Question

Perform a benefit /cost (B/C) analysis the for the following direct benefit projects having the same life time of 6 years and interest rate of 9% by finding the difference in B/C (i.e. incremental B/C) to select only one project. Write in the answer box the final result of the incremental B/C analysis. The projects have the following details, all calculated in AW form:

Project A : benefits = $102,817, cost =$70,849 and disbenefits =$5,208

Project B : benefits = $80,944, cost =$51,488 and disbenefits =$6,833

Write only the last number you obtain from the comparison steps in the answer box. If the answer is negative, include the negative sign in your answer.

Answer 1

Benefit Cost Ratio (BCR)= PV of (Benefits-Disbenefits)/PV of costs

Given, life of projects= 6 years and interest rate= 9%.

Project A:

Given,

Yearly benefits= $102,817 Disbenefits= $5,208 Net benefits= 102,817-5,208= $ 97,609

Yearly costs= $70,849

B/C Ratio= 97609 (PVIFA 9%, 6)/ 70849 (PVIFA 9%, 6)

= 97609*4.485919/ 70848* 4.485919 = $437,866.03/ $317,818.36 = 1.38

Project B:

Given,

Yearly benefits= $80,944 Disbenefits= $6,833 Net benefits= $74,111

Yearly costs= $51,488

B/C Ratio= 71411 (PVIFA 9%, 6)/ 51488 (PVIFA 9%, 6)

= 71411*4.485919/ 51488* 4.485919 = $ 320,343.93- $230,970.98 = 1.39