Question

Evaluate the following mutually exclusive alternatives with a horizon of 25 years and a minimum acceptable rate of return of 15 percent using the conventional benefit-cost ratio and net present worth analysis. Which project would you choose and why?

	A	B	C
Initial Investment	9,500	18,500	22,000
Annual Savings	3,200	5,000	9,800
Annual Costs	1,000	2,750	5,400
Salvage Value	6,000	4,200	14,000

Answer 1

Net Benefit for project A=3200/1.15+3200/1.15^2+3200/1.15^3+...+3200/1.15^25+6000/1.15^25=20685.27+182.26=20867.53

Net Cost for Project A=9500+1000/1.15+1000/1.15^2+...+1000/1.15^25=9500+6464.15=15964.15

PW=20867.53-15964.15=4903.38

B/C =20867.53/15964.2=1.31

Simlalrly for B

Net Benefit for project B=5000/1.15+5000/1.15^2+5000/1.15^3+...+5000/1.15^25+4200/1.15^25=32320.74+127.58=32448.32

Net Cost for Project A=18500+2750/1.15+2750/1.15^2+...+2750/1.15^25=18500+17776=36276

PW=32448.32-36276=-3827.68

B/C =32448.32/36276=0.89

Simlalrly for c

Net Benefit for project B=9800/1.15+9800/1.15^2+9800/1.15^3+...+9800/1.15^25+14000/1.15^25=63348.7+425.3=63774

Net Cost for Project A=22000+5400/1.15+5400/1.15^2+...+5400/1.15^25=22000+34906=57106

PW=63774-57106=6878

B/C =63774/57106=1.12

B/C ratio is higher for project A but Net worth is highest for project C

Benefit Cost ratio is enough to be greater than 1 and In Project C we have highest net worth

Therefore we should choose project C