In: Economics
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 |
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