Question

9- Two alternatives with identical benefits are being considered: 49 A B Initial cost $500 $800 Uniform annual cost 200 150 Useful life, in years 8 8 (a) Compute the payback period if Alt. B is purchased rather than Alt. A (b) Use a MARR of 10% and benefit-cost ratio analysis to identify the alternative that should be selected

Answer 1

Alternative A

Initial Cost = 500

Unifor annual benefits = 200

Simple payback period = Initial cost/Annual benefits

Simple payback period = 500/200 = 2.5 years

Alternative B

Initial Cost = 800

Unifor annual benefits = 150

Simple payback period = Initial cost/Annual benefits

Simple payback period = 800/150 = 5.33 years

A. The pay back period of Alternative B is 5.33 years if B is purchased rather than Alternative A.

B. MARR = 10%

Benefit Cost Ratio of Alternative A (using PW Method)

B/ C Ratio = PW of Benefits / PW of Costs

B/ C Ratio = 200 (P/A, 10%, 8) / 500

B/ C Ratio = 200 (5.33493) / 500

B/ C Ratio = 1066.98 / 500

B/ C Ratio = 2.13

Benefit Cost Ratio of Alternative B (using PW Method)

B/ C Ratio = PW of Benefits / PW of Costs

B/ C Ratio = 150 (P/A, 10%, 8) / 800

B/ C Ratio = 150 (5.33493) / 800

B/ C Ratio = 800/800

B/ C Ratio = 1

Under the benefit cost ratio method, alternative A is to be selected.