Question

1. A public project is considered to extend irrigation canals into a desert area. The initial cost of the project is expected to be $1.5 million, with annual maintenance costs of $25,000 per year. Agricultural revenue is expected to be $175,000 per year, the canal must be dredged every 3 years at a cost of $60,000 and there is a $15,000 per year disbenefit associated with the project. (a) Set up the spreadsheet and (b) use hand calculations to calculate the B/C ratio (based on annual worth) to determine whether the project should be undertaken, using a 20-year study period and a discount rate of 6% per year.

answer step by step please.

Answer 1

AW of investment cost : $15,000,00(A/P,6%,20) = $130,780 per year

AW of benefit :$175,000 per year

AW of disbenefit : $15,000 per year

AW of M&O cost : $25,000 per year

AW of every 3-year cost (finding PW and divided by 20) = 10203 per year

B/C ratio = (benefits - disbenefits)/ cost

B/C ratio = (175000-15000)/(130780+25000+10203)

B/C ratio = 160000/165983

B/C ratio = 0.96

The project is not justified, since B/C<1.