years Opportunity Cost of Capital . City of So corro has identified a series of

Question

years Opportunity Cost of Capital . City of So corro has identified a series of projects to replace incandescent light bulbs with LED bulbs in traffic lights, office buildings, and other uses. - which projects should be done if the budget is (a) 500,000; (b) 1.200,000? - what is the opportunity cost of capital for each budget? Project First Cost Annual Benefit Economic Life (years) 50,000 70,000 40,000 12,500 75.000 32.000 125.000 200,000 300,000 100,000 50,000 250,000 150,000 400,000 15 10 10 20 6

Explanation / Answer

Calculation of %age of return of income of Each Project %age of ROI= annual benefits / first cost*100 Project First Cost Annual Benefit %age of Return Economic life 1 200000 50000 25.00% 15 2 300000 70000 23.33% 10 3 100000 40000 40.00% 5 4 50000 12500 25.00% 10 5 250000 75000 30.00% 5 6 150000 32000 21.33% 20 7 400000 125000 31.25% 5 Ranking of project based on %age of return of income Project First Cost Annual Benefit %age of Return Economic life 3 100000 40000 40.00% 5 7 400000 125000 31.25% 5 5 250000 75000 30.00% 5 4 50000 12500 25.00% 10 1 200000 50000 25.00% 15 2 300000 70000 23.33% 10 6 150000 32000 21.33% 20 Project should be done if Budget is 500000 1200000 Project 3 & 7 3,7,5,4,1 & 2* * If project is divisal than go for project 2 partially Opportunity cost of capital Opportunity cost of capital is benefit foregone for selecting one project over other project Project First Cost Annual Benefit %age of Return Economic life Opportunity cost 3 100000 40000 40.00% 5 0 7 400000 125000 31.25% 5 8.75% 5 250000 75000 30.00% 5 10.00% 4 50000 12500 25.00% 10 15.00% 1 200000 50000 25.00% 15 15.00% 2 300000 70000 23.33% 10 16.67% 6 150000 32000 21.33% 20 18.67%

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