Question

.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.

Answer 1

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