Please provide how the solution was achieved and what formulas were used without
ID: 2765159 • Letter: P
Question
Please provide how the solution was achieved and what formulas were used without using a spreadsheet program.
A city government is considering increasing the capacity of the current wastewater treatment plant. The estimated financial data for the project are as follows:
Description
Cash flow
Capital investment
$1,500,000
Project life
25 years
Incremental annual benefits
$180,000
Incremental annual costs
$75,000
Salvage value
$35,000
Discount rate
6%
Calculate the benefit-cost ratio for this capacity expansion project.
Description
Cash flow
Capital investment
$1,500,000
Project life
25 years
Incremental annual benefits
$180,000
Incremental annual costs
$75,000
Salvage value
$35,000
Discount rate
6%
Explanation / Answer
formula for benefit cost ratio= Net Benefits/Net costs
Net Benifits = Incremental annual benefits - incremental annula costs=$ 180000-$ 75000=$ 105000
Net costs = Capital Investment-Salvage value=$ 1500,000-$ 35000=$ 1465000
project life is 25 years
Discount rate =6%
to find out benefit cost analysis we have to find out discounted values of the future benefits
to find out discounted values the formula = Value/(1+r)n
here value =net benefits =$ 105000
r=6%
n= 25 years 105000/(1.06)25 = 105000/4.292=$ 450660
BCR ratio=net( discounted) benefits/net costs= 450660/1465000=0.308
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