(20 Pts.) 2. A company is considering five different methods for recycling a pet
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Question
(20 Pts.) 2. A company is considering five different methods for recycling a petroleum derivative from plastic containers. The investment costs and incomes are shown below All methods have a 10-year life with zero salvage value. The company uses a MARR of 15% per year. Using an Incremental Modified Benefit/Cost analysis, select the best method. Method First Cost, $15,000 19,000 Annual M &O; Cost,$10,000 12,000 9,000 ,000 13,000 2 4 45,000 33,000 48,000 Annual Income, $ 12,000 20,000 19,000 22,000 27,000Explanation / Answer
Modified B-C ratio = PW(B) – PW(O&M)/I
B = Benefit of project
O & M = Operating and maintenance cost
I = Initial investment
Modified B-C ratio for Method 1 = $ 12,000 x (P/A, 15 %, 10) – $ 10,000 x (P/A, 15 %, 10) /$ 15,000
= $ 12,000 x 5.0118 - $ 10,000 x 5.0118 /$ 15,000
= $ 60,225.6 - $ 50,188/$ 15,000
= $ 10,037.6/$ 15,000 = 0.669173
Modified B-C ratio for Method 2 = $ 20,000 x (P/A, 15 %, 10) – $ 12,000 x (P/A, 15 %, 10) /$ 19,000
= $ 20,000 x 5.0118 – $ 12,000 x 5.0118 /$ 19,000
= $ 100,376 -$ 60,225.6 /$ 19,000
= $ 40,150.4/$ 19,000 = 2.113179
Modified B-C ratio for Method 3 = $ 19,000 x (P/A, 15 %, 10) – $ 9,000 x (P/A, 15 %, 10) /$ 45,000
= $ 19,000 x 5.0118 – $ 9,000 x 5.0118 /$ 45,000
= $ 95,357.2 - $ 45,169.2/$ 45,000
= $ 50,188/$ 45,000 = 1.115289
Modified B-C ratio for Method 4 = $ 22,000 x (P/A, 15 %, 10) – $ 11,000 x (P/A, 15 %, 10) /$ 33,000
= $ 22,000 x 5.0118 – $ 11,000 x 5.0118 /$ 33,000
= $ 110,413.6 - $ 55,206.8/$ 33,000
= $ 55,206.8/$ 33,000 = 1.672933
Modified B-C ratio for Method 5 = $ 27,000 x (P/A, 15 %, 10) – $ 13,000 x (P/A, 15 %, 10) /$ 48,000
= $ 27,000 x 5.0118 – $ 13,000 x 5.0118 /$ 48,000
= $ 135,507.6 - $ 65,244.4/$ 48,000
= $ 70263.2/$ 33,000 = 1.463817
As Modified B-C ratio for Method 2 is highest, it should be selected.
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