A city government is considering increasing the capacity of the current waste wa

Question

A city government is considering increasing the capacity of the current waste water treatment plant. The estimated financial data for the project are as follows: Calculate the benefit-cost ratio for this capacity expansion project. Would the project be considered ceptable?

Explanation / Answer

Benefit = Total revenue before deductions Benefit-cost ratio = Benefit ratio/cost. If it is > 1 then the project is acceptable. Benefits = ((300000)/(1.05^1))+((300000)/(1.05^2))+((300000)/(1.05^3))+((300000)/(1.05^4))+((300000)/(1.05^5))+((300000)/(1.05^6))+((300000)/(1.05^7))+((300000)/(1.05^8))+((300000)/(1.05^9))+((300000)/(1.05^10))+((300000)/(1.05^11))+((300000)/(1.05^12))+((300000)/(1.05^13))+((300000)/(1.05^14))+((300000)/(1.05^15))+((300000)/(1.05^16))+((300000)/(1.05^17))+((300000)/(1.05^18))+((300000)/(1.05^19))+((300000)/(1.05^20))+((300000)/(1.05^21))+((300000)/(1.05^22))+((300000)/(1.05^23))+((300000)/(1.05^24))+((300000)/(1.05^25)) = $4,228,183.37 Cost = 1500000+((100000)/(1.05^1))+((100000)/(1.05^2))+((100000)/(1.05^3))+((100000)/(1.05^4))+((100000)/(1.05^5))+((100000)/(1.05^6))+((100000)/(1.05^7))+((100000)/(1.05^8))+((100000)/(1.05^9))+((100000)/(1.05^10))+((100000)/(1.05^11))+((100000)/(1.05^12))+((100000)/(1.05^13))+((100000)/(1.05^14))+((100000)/(1.05^15))+((100000)/(1.05^16))+((100000)/(1.05^17))+((100000)/(1.05^18))+((100000)/(1.05^19))+((100000)/(1.05^20))+((100000)/(1.05^21))+((100000)/(1.05^22))+((100000)/(1.05^23))+((100000)/(1.05^24))+((100000)/(1.05^25)) = $2,909,394.457 Benefit-cost ratio = Benefit/cost = 1.4533 > 1....So project is acceptable.

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