.A city government is considering increasing the capacity of the current wastewater treatment plant. The estimated...
.A city government is considering increasing the capacity of the current wastewater treatment plant. The estimated financial data for the project are as follows: Description Cash flow Capital investment $1,500,000 Project life 25 years Incremental annual benefits $180,000 Incremental annual costs $75,000 Salvage value $35,000 Discount rate 6% Calculate the benefit-cost ratio for this capacity expansion project.
Homework Answers
Capital Investment = $1,500,000
Incremental annual benefits = $180,000
Incremental annual costs = $75,000
Salvage value = $35,000
Discount Rate = 6%
Project life = 25 years
Present worth of annual Benefits = $180,000 (P/A, 6%, 25)
Present worth of Benefits = $180,000 (12.7834) = 2,301,012
Present worth of cost
PW of capital investment = Capital investment – PW of Salvage value
PW of capital investment = $1,500,000 – $35,000 (P/F, 6%, 25)
PW of capital investment = $1,500,000 – $35,000 (0.2330) = 1,508,155
PW of Incremental annual costs = $75,000 (P/A, 6%, 25)
PW of Incremental annual costs = $75,000 (12.7834) = 958,755
Benefit cost Ratio = 2,301,012 / 1,508,155 + 958,755 = 0.93
Benefit cost ratio < 1- Reject the Project or investment
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