Question

13. Using benefit-cost ratio analysis, b 5 year useful life, and a 15% MARR, determine which of the following mutually exclusive alternatives should be selected. D 310 380 470 Cost Annual Benefit Salvage/Value Ule OS 8 90

Answer 1

Ans: Alternative A should be selected.

Explanation:

For Alternative A;

Present value of annual benefit = A ( P/A , i ,n )

= 32 ( P/A , 15% , 5 )

= 32 * 3.352 = 107.26

Benefit -cost ratio = Present value of all benefits / Present value of all costs = 107.26 / 80 = 1.34

For Alternative B;

Present value of annual benefit = A ( P/A , i ,n )

= 65 ( P/A , 15% , 5 )

= 65 * 3.352 = 217.88

Benefit -cost ratio = Present value of all benefits / Present value of all costs = 217.88 / 180 = 1.21

For Alternative C;

Present value of annual benefit = A ( P/A , i ,n )

= 90 ( P/A , 15% , 5 )

= 90 * 3.352 = 301.68

Benefit -cost ratio = Present value of all benefits / Present value of all costs = 301.68 / 310 = 0.97

For Alternative D;

Present value of annual benefit = A ( P/A , i ,n )

= 126 ( P/A , 15% , 5 )

= 126 * 3.352 = 422.35

Benefit -cost ratio = Present value of all benefits / Present value of all costs = 422.35 / 380 = 1.11

For Alternative E;

Present value of annual benefit = A ( P/A , i ,n )

= 150 ( P/A , 15% , 5 )

= 150 * 3.352 = 502.8

Benefit -cost ratio = Present value of all benefits / Present value of all costs = 502.8 / 470 = 1.07

Since the benefit-cost ratio is greater for  alternative A , then the alternative A should be selected.