Question

A company has $10M to invest. There are three possible alternatives of investment: The i^th alternative requires an investment of C_i and gives benefits with a present value of P_i. The following table provides values, in millions of dollar, of C_i and P_i for the alternatives.

Alternative,i	Investment Ci	Present Value of Benefits Pi
1	4	7
2	7	14
3	6	11

Suppose you make a decision based on the benefit-cost ratio analysis. Then you will invest in alternative (or alternatives):

(a) 1 only

(b) 1, 2 and 3

(c) 3 only

(d) 2 only

(e) 2 and 3 only

(f) 1 and 3 only

Answer 1

Investment budget=   $10 million
Benefit cost ratio= PV of cash inflows/PV of cash outflow  
Alternative 1  
BC ratio= 7/4=   1.75
  
Alternative 2  
BC ratio= 14/7=   2
  
Alternative 3  
BC ratio= 11/6=   1.833333333
  
Alternative 2 is best.But Investment required is $7 millions.   
remianing amount $3 millions cannot be invested in either project.  
  
So Alternative 1 and 3 combined BC ratio is  
(11+7)/(6+4)=   1.8
  
If Investment is made in only Alternative 2, BC ratio is 2  
  
If Investment made in altery 1 and 3 BC ratio is 1.8  
  
If Investment made only in Alternative 3 BC ratio is 1.83333  
  
  
If Investment made only in Alternative 1 BC ratio is 1.75  
  
Highest BC ratio is of Alternative 2. So only alternative 2 will be chosen  
Answer is D