10 out of 10 points Question 12 , Duba·Mir stry of Health is considering setting

Question

10 out of 10 points Question 12 , Duba·Mir stry of Health is considering setting up a new dvson todevelop cancer drugs Option 1 It expects to pay 120 million Dhs for set up costs of ts new division today and 6 miion Dhs operating costs each year for the next 12 years. It estimates that the new division will be able to provide benefits of 278 milion Dhs at the end of year 12 Option 2 t could use this money to support its diabetes combat program In that case it would spend 16 milion Dhs per year and provide benefits of 18 million per year Assuming a minimum acceptable rate of return s 14% per year and the project life is 12 years: Queston otal Annual Cost of Option otal Annual Benelits for Option 1 enefit cost ratio for Option 2 Which option wll you select Question 13 10 out of 10 pons

Explanation / Answer

1). Option 1:

Total Fixed Cost: 120 million Dbs

Total Variable Cost = Cost per year * number of years = 6*12 = 72 million dbs

Total Annual Cost = Average fixed cost in year 1 + variable cost in one year = 10+6 = 16 million

2). Total Annual Benefit of Option 1 = Total Benefit/number of years = 278/12 = 23 million db

3) .Benefit cost ratio of option 2 = Benefit per year/cost per year = 18/16 = 1.125 units per Db

4) Option 1 should be chosen. This is because it has a higher benefit cost ratio.

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