Question

A project being consider by a local government has the following estimated benefit – cost data
$1000 investment for the first 2 years and then recurring cost of $5000 for the coming 2 years and
$8000 for year 5& 6 respectively. Also there are benefits of $20,000, $30,000, $ 30,000 and
$20,000 starting from the third year. Consider the interest rate to be 10%, design an optimal
solution to perform cost-benefit analysis and conclude if the project is suitable or not.

Answer 1

Interest rate = 10%

Present value can be calculated as: [Cost or Benefit / (1 + rate of Interest)^^Year]

Year	Cost	Present value of cost	Benefit	Present value of benefit
1	1,000.00	909.09	-	-
2	1,000.00	826.45	-	-
3	5,000.00	3,756.57	20,000.00	15,026.30
4	5,000.00	3,415.07	30,000.00	20,490.40
5	8,000.00	4,967.37	30,000.00	18,627.64
6	8,000.00	4,515.79	20,000.00	11,289.48
		18,390.34		65,433.82

Cost - benefit analysis = (Present value of benefit / Present value of cost) = (65,433.82 / 18,390.34) = 3.55

As benefit - cost analysis is 3.55 which says that project is suitable and should be adopted.