Question

A project has a cost of $10 million, a useful life of 30 years, annual operation and maintenance costs equal 2% of the capital cost, and annual benefit of $1.5 million..

1. Find the simple payback period of the project.

2. Find out benefit-cost ratio if the discount rate is 10%

Answer 1

A project has a cost of $10 million, a useful life of 30 years, annual operation and maintenance costs equal 2% of the capital cost, and annual benefit of $1.5 million..

1. Find the simple payback period of the project.

2. Find out benefit-cost ratio if the discount rate is 10%

Initial cost = $10,000,000

Useful life = 30 years

Annual O & M Cost = 2% of Capital cost

Annual O & M Cost = $10,000,000 * 2% = 200,000

Annual Benefit = $1,500,000

Calculate Net Cash Flow

Net Cash Flow = Annual Benefits – Annual O & M Cost

Net Cash Flow = $1,500,000 – 200,000 = 1,300,000

1. Find the simple payback period of the project.

Simple Payback Period = Initial Investment ÷ Net Cash Flow

Simple Payback Period = $10,000,000 ÷ 1,300,000 = 7.69 years

2. Find out benefit-cost ratio if the discount rate is 10%

Benefit Cost Ratio

= Present Worth of Benefits ÷ Initial Investment + Present Worth of Annual O&M Cost

= $1,500,000 (P/A, 10%, 30) ÷ $10,000,000 + 200,000 (P/A, 10%, 30)

= $1,500,000 (9.4269) ÷ $10,000,000 + 200,000 (9.4269)

= $14,140,350 ÷ $10,000,000 + 1,885,380

= $14,140,350 ÷ 11,885,380

= 1.189 or 1.19