Question

The government has hired you to advise them on the merits of a project that is...

The government has hired you to advise them on the merits of a project that is being
proposed. The project is expected to generate benefits of 14 million dollars today, 5 million
dollars in one year from today, and 1 million dollars in two years from today. (These are the only
years of concern.) The project costs nothing today but will cost 20 million dollars in two years.
Assume the interest rate (discount rate) is 10%. If the benefit-cost ratio is greater than 1, the
project should go ahead. What is your policy suggestion?

Business   Economics   
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Homework Answers

Answer #1

Benefits of the Project

14,000,000 in year zero (now)

5,000,000 in year one (1)

1,000,000 in year two (2)

Costs of the Project

20,000,000 in year two (2)

Discount Rate = 10%

What is the Benefit Cost Ratio?

Using Present Worth Method calculate the B-C Ratio

Step – 1 Calculate PW of Benefits

PW of Benefits = 14,000,000 + 5,000,000 (1 + 0.10) -1 + 1,000,000 (1 + 0.10) -2

PW of Benefits = 19,371,900

Step – 2 Calculate PW of Costs

PW of Benefits = 14,000,000 (1 + 0.10) -2 = 16528925.62

Step – 3 Calculate B-C Ratio

B-C Ratio = PW of Benefits ÷ PW of Costs

B-C Ratio = 19,371,900 ÷ 16,528,925.62

B-C Ratio = 1.17

B-C Ratio > 1, ACCEPT THE PROJECT.

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