A road resurfacing project costs $200,000, lasts 5 years and saves $100,000 annually in patching costs....

A road resurfacing project costs $200,000, lasts 5 years and saves $100,000 annually in patching costs. MARR is 10%. Determine the BCR (round off to 3 decimal places) of the project.

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Expert Solution

A benefit-cost ratio (BCR) is a ratio used in a cost-benefit analysis to summarize the overall relationship between the relative costs and benefits of a proposed project. BCR can be expressed in monetary or qualitative terms. If a project has a BCR greater than 1.0, the project is expected to deliver a positive net present value to a firm and its investors.

Initial Cost = $200,000

Life = 5 years

Annual Savings = $100000

MARR = 10%

Using Present Worth Method

B/C Ratio = PW of Benefits ÷ PW of Cost

B/C Ratio = $10000 (P/A, 10%, 5) ÷ $200,000

B/C Ratio = $150,000 (3.7908) ÷ $200,000

B/C Ratio = $568620 ÷ $200,000

B/C Ratio = 2.843

The benefit cost ratio is 2.843 B.C Ratio is greater than 1, so select the project as the project is expected to deliver a positive net present value (NPV) and will have an internal rate of return (IRR) above the discount rate used in the DCF calculations.

Rahul Sunny answered 1 year ago

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