Question

From the beneath table find best B/C ratio.

Assume the program period for each is six year and interest rate is 6%.

Program	Initial cost year 0	Annual cost year 2 through 6	Estimated benefits year 2 through 6
1	700,000	350,000	542,433
2	2,200,000	500,000	1.084,867
3	1,200,000	140,000	433,947

Answer 1

Program	1	2	3
Initial cost year 0	700,000	2,200,000	1,200,000
Annual cost year 2 through 6	350,000	500,000	140,000
Estimated benefits year 2 through 6	542,433	1,084,867	433,947
Net Annual Benefits year 2 through 6 (Annual Benefits – Annual Cost)	192,433	584,867	293,947
Benefit – Cost Ratio	1.09	1.06	0.97

Program period for each is six year and interest rate is 6%.

B/C Ratio using PW Method = PW of Benefits / Initial cost

Programme – 1

B-C Ratio = 192,433 (P/A, 6%, 5) (P/F, 6%, 1) / 700,000

B-C Ratio = 192,433 (4.2124) (0.9434) / 700,000

B-C Ratio = 1.09

Programme – 2

B-C Ratio = 584,867 (P/A, 6%, 5) (P/F, 6%, 1) / 2,200,000

B-C Ratio = 584,867 (4.2124) (0.9434) / 2,200,000

B-C Ratio = 1.06

Programme – 3

B-C Ratio = 293,947 (P/A, 6%, 5) (P/F, 6%, 1) / 1,200,000

B-C Ratio = 293,947 (4.2124) (0.9434) / 1,200,000

B-C Ratio = 0.97

Decision – The best benefit cost ratio is 1.09 of Programme – 1