Question

Find the benefit-cost ratio and profitability index for group’s company startup at an interest rate of 10%

Initial Investment for Company Startup:    $2,000,000  
Anticipated Annual Costs:          
Annual Operating and Maintenance Costs   $20,000
Annual Material Costs           $50,000
Annual Personnel Costs           $80,000
Anticipated Revenue:          
Year 1:   $590,000          
Year 2:   $570,000          
Year 3:   $520,000          
Year 4:   $150,000          
Year 5:   $580,000          
Year 6:   $930,000          
Year 7:   $650,000

Answer 1

Costs

Initial Cost =$2,000,000

Annual Costs:

O&M Costs =$20000

Material Costs =$50000

Personnel Costs =$80000

Total Annual Costs=(20,000+50,000+80,000=150,000)

Benefits

Annual Revenues:

Year 1: $590,000
Year 2: $570,000
Year 3: $520,000
Year 4: $150,000
Year 5: $580,000
Year 6: $930,000
Year 7: $650,000

MARR=10%

Benefit-Cost Ratio=PW of Benefits/(PW of Costs+ Initial Cost)

PW of Benefits=PW of Revenue

PW of Revenue=590000/(1.1)+570000/(1.1^2)+520000/(1.1)^3+150000/(1.1)^4+580000/(1.1^5)+930000/(1.1^6)+650000/(1.1^7)
=2,719,221.63

PW of Annual Costs=150000(P/A,10%,7)=150,000*4.86841=730261.5

B/C ratio=2,719,221.63/(730,261.5+2,000,000)=2,719,221.6/2,730.261.5=0.99595

B/C Ratio=0.996

Profitability Index=Net Present Worth/Initial Investment

NPW=PW of Benefits-PW of Costs=2,719,221.63-2,730,261.5=-11,039.87

PI= NPW + Initial Investment/Initial Investment=(2,000,000-11,039.87)/2,000,000=0.9949