Question

Ch. Benefit / Cost Analysis Problem 1: ICON Co. will perform a project that will have a first cost of $1 million with an annual maintenance cost of $50,000 and a 10 year life. This project is expected to benefit the company with $250,000 per year. But also the lost income to the company is estimated to be $30,000 per year. At an interest rate of 6% per year, should the project be undertaken? Problem2:ICON Co. is planning to make a new road that has a first cost $200,000. Also to maintain this road, they need to spend $20,000 per year. This road is expected to increase their property value by 200%. If the previous market value of a property was $1,000,000, calculate the B/C ratio using an interest rate of 6% per year and a 20-year study period.

Answer 1

Problem 1]

B/C ratio = present value of benefits / present value of costs

The lost income is a cost.

Present value = future value / (1 + interest rate)^{number of years}

B/C ratio is 1.16

Yes,the project should be undertaken as the B/C ratio is more than 1

A B C D F G E Lost Income 1 Year Maintenance Benefits Benefits First Cost 0 $1,000,000 cov a AwN $50,000 $50,000 $50,000 $50,000 $50,000 $50,000 $50,000 $50,000 $50,000 $50,000 $250,000 $250,000 $250,000 $250,000 $250,000 $250,000 $250,000 $250,000 $250,000 $250,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $250,000 $250,000 $250,000 $250,000 $250,000 $250,000 $250,000 $250,000 $250,000 $250,000 Costs $1,000,000 $80,000 $80,000 $80,000 $80,000 $80,000 $80,000 $80,000 $80,000 $80,000 $80,000 TOTAL B/C ratio H PV of benefits PV of costs $1,000,000 $235,849 $75,472 $222,499 $71,200 $209,905 $67,170 $198,023 $63,367 $186,815 $59,781 $176,240 $56,397 $166,264 $53,205 $156,853 $50,193 $147,975 $47,352 $139,599 $44,672 $1,840,022 $1,588,807 1.16

А в Ε F G H =D3 =D4 -D5 1 Year First Cost Maintenance Benefits Lost Income Benefits Costs PV of benefits PV of costs 2 0 1000000 =B2 =G2/(1+6%)^A2 3 1 50000 250000 30000 =C3+3 =F3/(1+6%)^A3 =G3/(1+6%)^A3 50000 250000 30000 =C4+E4 =F4/(1+6%)^A4 =G4/(1+6%)^A4 50000 250000 30000 =C5+5 =F5/(1+6%)^A5 =G5/(1+6%)^A5 50000 250000 30000 =C6+E6 =F6/(1+6%)^A6 =G6/(1+6%)^A6 50000 250000 30000 =D7 =C7+E7 =F7/(1+6%)^A7 =G7/(1+6%)^A7 50000 250000 30000 =D8 =C8+E8 =F8/(1+6%)^A8 =G8/(1+6%)^A8 50000 250000 30000 =D9 =C9+E9 =F9/(1+6%)^A9 =99/(1+6%)^A9 50000 250000 30000 =D10 =C10+E10 =F10/(1+6%)^A10 =G10/(1+6%)^A10 50000 250000 30000 =D11 =C11+E11 =F11/(1+6%)^A11 =G11/(1+6%)^A11 12 10 50000 250000 30000 =D12 =C12+E12 =F12/(1+6%)^A12 =G12/(1+6%)^A12 13 TOTAL =SUM(H3:H12) =SUM(12:112) 14 B/C ratio =H13/113 NO