An alternative has the following cash flows: benefits = $50,000 per year, dis-be

Question

An alternative has the following cash flows: benefits = $50,000 per year, dis-benefits-$27,000 per year; Initial cost = $250,000; O&M; costs of $10,000 per year. If the alternative has an infinite life and the interest rate is 1 5% per year, the conventional B/C ratio is closest to: 4. A. 0.91 B. 0.66 C. 0.52 D. 0.48 Formula used: If $1000 is invested now, the future dollars required 10 years from now to earn a real interest rate of 6% per year, when the inflation rate is 4% per year, is closest to: A. $1480 5. B. $1790 C. $2650 D. Over $2700 Formula used:

Explanation / Answer

4. Benefit (B) = 50000 - 27000 = $23000/year

Cost (C) = 10000 [per year] + 250000 [fixed cost]

Including an interest rate of 15% (1+15/100)=1.15 for life infinitely

B = 23000 (1+1.15+1.15^2+...........)

C = 250000 * (1.15^inf) +10000 (1+1.15+1.15^2+...........)

B/C = 23 [1+(1/1.15) + (1/1.15^2) +.......] / {250000 + 10000 [1 + (1/1.15) + (1/1.15^2) +......]}

1+1/1.15 + 1/1.15^2 +......= 1/(1-1/1.15) = 7.70

B/C = 23 * 7.7 / (250+10 * 7.7) = 177/327 = 0.541 < 1

Therefore, correct answer is option (C) = 0.52.

Formula used: B/C = Net Benefit [1 + (1/r) + (1/r^2) +......] / {Fixed Cost + M&O cost [1 + (1/r) + (1/r^2) + ....]}

You are allowed to ask only one question at a time. So, I have answered 4. Hope it helps.

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