Four proposals are available for funding. The investment costs and income associ

Question

Four proposals are available for funding. The investment costs and income associated with each are shown. Consider operating cost as a disbenefit P2 P3 30000 19600 P4 45000 P1 15000 -- 2,000 15000 | 18000 | 11000-t 15000 12000 First cost,$ 9000 Operating cost, $peryear Salvage value, S poryear 9000 11000 30000 8000 4000 Expected Benefits, spor years! 15000-18000| 21000128000 ll proposals have a 10-year life and the MARR is 10% per year. 21000 Assuming that a Determine which one should be selected using: posals have a (a) B/C Method (b) Incremental B/C Method

Explanation / Answer

a) B/C of P1= PW of Expected benefits/(First cost+PW of operating cost)

= 15000(P/A,10%,10)/ (15000+9000(P/A,10%,10)

= (15000*6.145)/ (15000+(9000*6.145))

= 1.311

B/C of P2= PW of Expected benefits/(First cost+PW of operating cost)

= 18000(P/A,10%,10)/ (20000+11000(P/A,10%,10)

=(18000*6.145)/ (20000+(11000*6.145))

= 1.35

B/C of P3= PW of Expected benefits/(First cost+PW of operating cost)

= 21000(P/A,10%,10)/ (30000+11000(P/A,10%,10)

=(21000*6.145)/ (30000+(11000*6.145))

= 1.32

B/C of P4= PW of Expected benefits/(First cost+PW of operating cost)

= 28000(P/A,10%,10)/ (45000+18000(P/A,10%,10)

=(28000*6.145)/ (45000+(18000*6.145))

= 1.105

Since B/C for P2 is highest we will select P2 proposal.

b)for Incremental B/C we will compare the other proposals with P4 since the expected benefits are highest

Incremental B/C for P1= 13000(P/A,10%,10)/ (30000+9000(P/A,10%,10)

=(13000*6.145)/ (30000+(9000*6.145))

= 0.93

Incremental B/C for P2= 10000(P/A,10%,10)/ (25000+7000(P/A,10%,10)

=(10000*6.145)/ (25000+(7000*6.145))

= 0.903

Incremental B/C for P3= 7000(P/A,10%,10)/ (15000+3000(P/A,10%,10)

=(7000*6.145)/ (15000+(3000*6.145))

= 1.28

Since the Incremental B/C for P3 is greater than 1 for P3 so we select P3 proposal.

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