Thanks A top manager in his company has been asked to consider the following mut

Question

Thanks A top manager in his company has been asked to consider the following mutually exclusive investment alternatives: Alternatives Initial investment ($)|?9,50?-18,500|-22,000 Annual savings (S3,2005,0009,800 Annual costs ($)|?1,0001-27501-6400 Savage value (S 6,000 4,200+14,000 Each alternative has a 15-year project life, and the MARR is 12 %. (i) Use the conventional benefit-cost ratio to evaluate the alternatives and make a recommendation (ii) If the modified benefit-cost ratio is used instead, will the recommendation be any different?

Explanation / Answer

Conventional Benefit Cost Ratio=(PW of Savings-PW of Costs)/(Initial Investment-PW of Salvage Value)

PW of Savings for A=3200/(1.15)+3200/1.15^2+...+3200/1.15^15

PW of Costs for A=1000/1.15+1000/1.15^2+..+1000/1.15^15

PW of Salvage Value=6000/1.15^15

Modified BCR for A=(21794.8-6810.9)/(9500-1096.2)=1.782

PW of Savings for B=5000/(1.15)+5000/1.15^2+...+5000/1.15^15

PW of Costs for B=2750/1.15+2750/1.15^2+..+2750/1.15^15

PW of Salvage Value=4200/1.15^15

Modified BCR for B=(34054.32-18730)/(18500-767.32)=0.8641

PW of Savings for C=9800/(1.15)+9800/1.15^2+...+9800/1.15^15

PW of Costs for C=6400/1.15+6400/1.15^2+..+6400/1.15^15

PW of Salvage Value=14000/1.15^15

Modified BCR for C=(66746.5-43590)/(22000-2557.8)=0.8713

Hence BCR for A is higher than B and C

Conventional BCR for A=AW of Benefits/AW of Costs

=22890.94/(6810.86+9500)=1.403

Conventional BCR for B=34821.6/(18729.878+18500)=0.9353

Conventional BCR for C=(69304.21/(22000+43589.53)=1.0566

Even with Conventional BCR A remains the favourable project

Hence no changes in decision making

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.