Question

In: Accounting

For data shown, what is the benefit/cost ratio? BENEFITS Increase p. y. Additional business activity $4,000,000...

For data shown, what is the benefit/cost ratio?

BENEFITS Increase p. y.
Additional business activity $4,000,000 per year 4%
Estimated future economic activity $850,000 per year 5%
Reduction in accidents $200,000 per year 6%
DIS-BENEFITS
Destruction of vegetable gardens $340,000 per year 11%
Reduction in business on present road $185,000 per year 8%
COSTS
Initial cost $46,000,000 over 15 years
Maintenance cost $410,000 per year 10%
Interest rate RATE 7% p. y. c. y.
Life of project NPER 15 years

Group of answer choices

1.31

1.06

0.95

0.89

Solutions

Expert Solution

Particulars Amount Increase Per Year
Cost Of Investment 46000000 0%
Benefits
Additional Business Activity 4000000 4%
Estimated Future Economic Activity 850000 5%
Reduction in Accidents 200000 6%
Costs
Destruction of the vegetable garden 340000 11%
Reduction in business on the present road 185000 8%
Maintenance Costs 410000 10%
Interest Rate 7%
Life of Project 15 years
Year Cost of investment Additional Business Activity Estimated Future Economic Activity Reduction in Accidents Destruction of vegetable garden Reduction in business on present road Maintenance Costs Net Cash Flow
0 $   (46,000,000.00) $                                          -   $                              -   $                             -   $                                         -   $                                         -   $                          -   $ (46,000,000.00)
1 $                             -   $                     4,000,000.00 $            850,000.00 $           200,000.00 $                        340,000.00 $                        185,000.00 $         410,000.00 $      4,115,000.00
2 $                             -   $                     4,160,000.00 $            892,500.00 $           212,000.00 $                        377,400.00 $                        199,800.00 $         451,000.00 $      4,236,300.00
3 $                             -   $                     4,326,400.00 $            937,125.00 $           224,720.00 $                        418,914.00 $                        215,784.00 $         496,100.00 $      4,357,447.00
4 $                             -   $                     4,499,456.00 $            983,981.25 $           238,203.20 $                        464,994.54 $                        233,046.72 $         545,710.00 $      4,477,889.19
5 $                             -   $                     4,679,434.24 $        1,033,180.31 $           252,495.39 $                        516,143.94 $                        251,690.46 $         600,281.00 $      4,596,994.55
6 $                             -   $                     4,866,611.61 $        1,084,839.33 $           267,645.12 $                        572,919.77 $                        271,825.69 $         660,309.10 $      4,714,041.49
7 $                             -   $                     5,061,276.07 $        1,139,081.29 $           283,703.82 $                        635,940.95 $                        293,571.75 $         726,340.01 $      4,828,208.48
8 $                             -   $                     5,263,727.12 $        1,196,035.36 $           300,726.05 $                        705,894.45 $                        317,057.49 $         798,974.01 $      4,938,562.58
9 $                             -   $                     5,474,276.20 $        1,255,837.13 $           318,769.61 $                        783,542.84 $                        342,422.09 $         878,871.41 $      5,044,046.60
10 $                             -   $                     5,693,247.25 $        1,318,628.98 $           337,895.79 $                        869,732.55 $                        369,815.86 $         966,758.55 $      5,143,465.06
11 $                             -   $                     5,920,977.14 $        1,384,560.43 $           358,169.54 $                        965,403.14 $                        399,401.12 $     1,063,434.41 $      5,235,468.44
12 $                             -   $                     6,157,816.23 $        1,453,788.45 $           379,659.71 $                    1,071,597.48 $                        431,353.21 $     1,169,777.85 $      5,318,535.85
13 $                             -   $                     6,404,128.87 $        1,526,477.88 $           402,439.29 $                    1,189,473.20 $                        465,861.47 $     1,286,755.63 $      5,390,955.74
14 $                             -   $                     6,660,294.03 $        1,602,801.77 $           426,585.65 $                    1,320,315.26 $                        503,130.39 $     1,415,431.20 $      5,450,804.61
15 $                             -   $                     6,926,705.79 $        1,682,941.86 $           452,180.79 $                    1,465,549.93 $                        543,380.82 $     1,556,974.32 $      5,495,923.37

NPV = ($2,458,908.76)

Benefit-Cost Ratio = (NPV+Initial Investment)/Initial Investment

=(-2,458,908.76+46,000,000)/46,000,000

=0.95


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