Question

(10 pts) The city of New York is considering two separate cell tower providers. The city expects a benefit-cost ratio of 1.0 or better, and their cost of capital is 10% per year. Assume repeatability. Verizon AT&T Initial investment (first cost) $90,000 $170,000 Useful life in years 6 12 Market value at end of useful life $25,000 $40,500 Annual benefits from operation $30,000 $40,000 Annual operating expenses $9,800 $11,300 a. Conduct benefit-cost ratio on the Verizon and AT&T projects and indicate which project is the preferred project. b. Conduct an incremental difference to validate decision.

Answer 1

a. Pls see tables below. AT&T has a higher BC ratio and is better.

	Verizon					Net CF / 1.1^Time
T	Investment	Revenue	Cost	Salvage Value	Net CF	PV @ 10%
0	-90000.00				-90000.00	-90000.00
1		30000.00	-9800.00		20200.00	18363.64
2		30000.00	-9800.00		20200.00	16694.21
3		30000.00	-9800.00		20200.00	15176.56
4		30000.00	-9800.00		20200.00	13796.87
5		30000.00	-9800.00		20200.00	12542.61
6	-90000.00	30000.00	-9800.00	25000.00	-44800.00	-25288.43
7		30000.00	-9800.00		20200.00	10365.79
8		30000.00	-9800.00		20200.00	9423.45
9		30000.00	-9800.00		20200.00	8566.77
10		30000.00	-9800.00		20200.00	7787.97
11		30000.00	-9800.00		20200.00	7079.98
12		30000.00	-9800.00	25000.00	45200.00	14402.11
					B/C Ratio	1.21
					(Sum of PV of Net CF T1toT15 / -Investment)

	AT&T					Net CF / 1.1^Time
T	Investment	Revenue	Cost	Salvage Value	Net CF	PV @ 10%
0	-170000.00				-170000.00	-170000.00
1		40000.00	-11300.00		28700.00	26090.91
2		40000.00	-11300.00		28700.00	23719.01
3		40000.00	-11300.00		28700.00	21562.73
4		40000.00	-11300.00		28700.00	19602.49
5		40000.00	-11300.00		28700.00	17820.44
6		40000.00	-11300.00		28700.00	16200.40
7		40000.00	-11300.00		28700.00	14727.64
8		40000.00	-11300.00		28700.00	13388.76
9		40000.00	-11300.00		28700.00	12171.60
10		40000.00	-11300.00		28700.00	11065.09
11		40000.00	-11300.00		28700.00	10059.17
12		40000.00	-11300.00	40500.00	69200.00	22049.25
					B/C Ratio	1.23
					(Sum of PV of Net CF T1toT15 / -Investment)

b) The decision is validated when we do incremental analysis, as it yields a B/C ratio of 1.24. Pls see table below

	Incremental (AT&T - Verizon)					Net CF / 1.1^Time
T	Investment	Revenue	Cost	Salvage Value	Net CF	PV @ 10%
0	-80000.00	0.00	0.00	0.00	-80000.00	-80000.00
1	0.00	10000.00	-1500.00	0.00	8500.00	7727.27
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