QUESTION 1 Consider the two alternatives below. Knowing that your company uses a

Question

QUESTION 1 Consider the two alternatives below. Knowing that your company uses a MAR 10%, use this data to answer the questions below. Option Initial Cost Annual Savings$14,600$12,000 Salvage Value Lifetime Premium Non-Premium $80,000 $40,000 2,000 $1,00 10 years 5 years What is the B/C ratio of the Premium Option? Enter your answer rounded to 2 decimal places) QUESTION 2 Given the data in the problem above, what is the Incremental Benefit to Cos ratio between the options? Enter in your answer rounded to 2 decimal places. QUESTION 3 Which option should be chosen between the two options?

Explanation / Answer

1. B/C Ratio = PV of Benefits/Cost Outlay

= [$14,600/1.101 + $14,600/1.102 + $14,600/1.103 + $14,600/1.104 + $14,600/1.105 + $14,600/1.106

+ $14,600/1.107 + $14,600/1.108 + $14,600/1.109 + $14,600/1.1010 + $2,000/1.1010] / $80,000

= [$13,272.73 + $12,066.12 + $10,969.20 + $9,972 + $9,065.45 + $8,241.32 + $7,492.11 + $6,811.01 + $6,191.83 + $5,628.93 + $771.09] / $80,000

= $90,481.77 / $80,000 = 1.13

b). B/C Ratio = PV of Benefits/Cost Outlay

= [$12,000/1.101 + $12,000/1.102 + $12,000/1.103 + $12,000/1.104 + $12,000/1.105 + $1,000/1.105] / $40,000

= [$10,909.09 + $9,917.36 + $9,015.78 + $8,196.16 + $7,451.06 + $620.92 ] / $40,000

= $46,110.36 / $40,000 = 1.15

c). Non-Premium Option should be chosen as it has a higher B/C ratio.

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