The two alternatives shown below are for projects to be considered to improve th
ID: 2802050 • Letter: T
Question
The two alternatives shown below are for projects to be considered to improve the traffic at a road intersection. Using a B/C analysis, an interest rte of 7% per year and a 10 year study period. First cost, S Annual M & O, $/year Benefits, $/year Dis-benefits, $/year Alternative A 38,000 49,000 110,000 26,000 Alternative B 87,000 64,000 160,000 You are required to do the following: a. Calculate the B/C ratio for alternative A b. Calculate the B/C ratio for alternative B (4 Marks) (4 Marks) (4 Marks) (3 Marks) c. Do the incremental B/C analysis ratio d. Choose the best alternativeExplanation / Answer
Refer meaning above givven in the question. Accordingly, modified B/C ratio should be preferred. Because per annum benefits ideally should be taken after annual cost
(a) & (b)
7.75
c) Incremental B/C = Incremental Benefit / Incremental Cost = (674,266 - 245,826) / (87,000-38,000) = 8.74
d) Therefore Alternative B is preferrable since incremental B/C is 8.74 which is more than 1 more project
(You can also think as: since B/C of Alternative B is higher than B/C of Alternative A, Alternative B is preferrable.
Alternative A Alternative B Initial Cost 38,000 87,000 Benefits 110,000 160,000 Disbenefits -26,000 - Annual M&O -49,000 -64,000 Net benefit p.a. 35,000 96,000 life 10 years 10 years P/V of Net Benefits =35000x7.0236 =96000x7.0236 Net benefits p.a. x cdf (7%,10years) P/V of Net Benefits 245,826 674,266 Modified B/C Ratio =245,826 / 38,000 =674,266 / 87,000 6.477.75
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