Q8: DEW A has two research facility. The flow conventional B-C ratio method, wi

Question

Q8: DEW A has two research facility. The flow conventional B-C ratio method, wi alternative must be selected. Part 2: ( 30 Marks--)ewal energy alternati ociatedws th year Q8: DEW A has two renewdow estimat Onal Be cash flow erzy altermatives are available for providing enerwyn at an interest rate of 10% per year over a 25-year stu for providing energy at a remote governme dy period. One alte estimates assoae vlab an intere the equivalent-worth measure, to determine wh (15 m wim es assciated with ed with each alternative are given below. Use the o method, with Annual Worth as AlternativeI $1,000,0005 Initial cost, $ Annual maintenance Annual benefits, S/yr Salvage value, S 990,000 5359,500 15,800 (XX) costs, S/yr $380,000 500,000 59.500 17,000 toooooo ( 0 . Ilo2) -380 000 50 990200 49

Explanation / Answer

Alternative I

Initial cost = $1,000,000

Annual maintenance cost = $380,000

Annual benefits = $500,000

Salvage value = $17,000

Time period = 25 years

Interest rate = 10%

Calculate the annual worth of cost -

AWc = $1,000,000(A/P, 10%, 25) + $380,000

AWc = ($1,000,000 * 0.1102) + $380,000

AWc = $110,200 + $380,000

AWc = $490,200

Calculate the annual worth of benefits -

AWb = $500,000 + $17,000(A/F, 10%, 25)

AWb = $500,000 + ($17,000 * 0.0102)

AWb = $500,000 + $173.4

AWb = $500,173.4

Calculate the Benefit/Cost Ratio -

B/C ratio = AWb/AWc = $500,173.4/$490,200 = 1.02

The Benefit/Cost Ratio of Alternative I is 1.02

Alternative II

Initial cost = $990,000

Annual maintenance cost = $359,500

Annual benefits = $459,500

Salvage value = $15,800

Time period = 25 years

Interest rate = 10%

Calculate the annual worth of cost -

AWc = $990,000(A/P, 10%, 25) + $359,500

AWc = ($990,000 * 0.1102) + $359,500

AWc = $109,098 + $359,500

AWc = $468,598

Calculate the annual worth of benefits -

AWb = $459,500 + $15,800(A/F, 10%, 25)

AWb = $459,500 + ($15,800 * 0.0102)

AWb = $459,500 + $161.16

AWb = $459,661.16

Calculate the Benefit/Cost Ratio -

B/C ratio = AWb/AWc = $459,661.16/$468,598 = 0.98

The Benefit/Cost Ratio of Alternative II is 0.98

The benefit/cost ratio if Alternative I is higher.

Therefore, Alternative I should be selected.

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