Question

The following four mutually exclusive alternatives have no salvage value after 10 years. Consider a MARR of 16%. a. Determine the Benefit cost ratio for each option, and the incremental analysis to determine which option should be selected b. Determine the payback period for each option and determine which option should be selected A B С D 8000 6500 6000 9500 Option Initial cost Yearly Benefit $1,195.5 $1,717.2 5 $1,446.3 5 $1,821.2 8 1

Answer 1

Solution :-

Present Value of Benefits = Annual Benefits * PVAF ( 16% , 10 )

Alt A = $1,717.52 * 4.833 = $8299.86

Alt B = $1,446.35 * 4.833 = $6,990.54

Alt C = $1,195.51 * 4.833 = $5,778.17

Alt D = $1,821.28 * 4.833 = $8,802.66

Benefit cost Ratio = Present Value of Benefits / Initial Cost

Alt A = $8,299.86 / $8,000 = 1.037 times

Alt B = $6,990.54 / $6,500 = 1.075 times

Alt C = $5,778.17 / $6,000 = 0.963 times

Alt D = $8,802.66 / $9,500 = 0.927 times

As the Benefit Cost Ratio of Alternative C and D is less than 1 So Don't accept the Project

Now Benefit Cost Ratio is higher the Better and Acceptable if greater than Equal to 1

So Choose Alternative B

Now on the Basis of Incremental Analysis , Compare A and B

Incremental B/C Ratio = ( $8,299.86 - $6,990.54 ) / ( $8,000 - $6,500 ) =

= $1,309.32 / $1,500  

= 0.873

As incremental Benefit Cost Ratio is Less than 1

So Choose Alternative B

(b)

Payback Period = Initial Investment / Annual Benefit

Alt A = $8,000 / $1,717.25 = 4.66 Years

Alt B = $6,500 / $1,446.35 = 4.49 Years

Alt C = $6,000 / $1,195.51 = 5.02 Years

Alt D = $9,500 / $1,821.28 = 5.22 Years

As the Payback Period of Alternative B is lower so Choose Alternative B

As Payback Period is lower the Better

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