Question

In: Economics

The two ME alternatives shown are under consideration for facility improvements in a company in Abu...

The two ME alternatives shown are under consideration for facility improvements in a company in Abu Dhabi. Determine which one should be selected based on a B/C analysis. Assume an interest rate of 10% per year and a 5-year study period.

                                                                                                           Alternative X Alternative Y
First costs, AED 40,000 90,000
Annual M&O costs, AED per year 50,000 20,000
Benefits, AED per year 120,000 150,000
Disbenefits, AED per year 30,000 10,000



Match the closest correct answers for the below questions:

      -       A.       B.       C.       D.       E.       F.       G.       H.       I.       J.       K.   

What is the total annual cost of Alternative X?
      -       A.       B.       C.       D.       E.       F.       G.       H.       I.       J.       K.   

What is the total annual cost of Alternative Y?
      -       A.       B.       C.       D.       E.       F.       G.       H.       I.       J.       K.   

What is the B/C ratio of Alternative X?
      -       A.       B.       C.       D.       E.       F.       G.       H.       I.       J.       K.   

What is the B/ C ratio of Alternative Y?
      -       A.       B.       C.       D.       E.       F.       G.       H.       I.       J.       K.   

What is the incremental B/C (ΔB/C) ratio between the two alternatives, X and Y?
      -       A.       B.       C.       D.       E.       F.       G.       H.       I.       J.       K.   

Which alternative, if any, should be chosen?
A.

[AED 43,742]
B.

[Alternative Y]
C.

[DO NOTHING (DN)]
D.

[-0.59]
E.

[1.49]
F.

[3.2]
G.

[AED 60,552]
H.

[AED 23,742]
I.

[AED 10,552]
J.

[-2.97]
K.

[Alternative X]

Solutions

Expert Solution

Answer a)

Initial Cost of Alternate X AED 40,000

Annual cost is given by, PV= P * (1- (1+r)^-n) / r , P= to be calculated, r = 10%, n= 5 years, PV = AED 40000

Hence 40000 = P * (1-(1+10%)^-5 /10%

40000 = P * (1-(1.1)^-5 /0.1

40000 = P * (1-0.6209) /0.1

40000 = P * 0.3791/0.1

P= 40000 *0.1 / 0.3791

P =AED 10551.31

Hence annual cost is AED 10551.31, in addition AED 50000 is spent on annual O&M. Hence total annual cost is 10551.31+50000 = AED 60551.31

Hence option G is correct

Answer b

Initial Cost of Alternate Y AED 90,000

Annual cost is given by, PV= P * (1- (1+r)^-n) / r , P= to be calculated, r = 10%, n= 5 years, PV = AED 90000

Hence 000000 = P * (1-(1+10%)^-5 /10%

90000 = P * (1-(1.1)^-5 /0.1

90000 = P * (1-0.6209) /0.1

90000 = P * 0.3791/0.1

P= 90000 *0.1 / 0.3791

P =AED 23740.44

Hence annual cost is AED 123740.44, in addition AED 20000 is spent on annual O&M. Hence total annual cost is 23740.44+20000 = AED 43740.44

Hence option A is correct

Answer c)

Total Benefit from Alternate X = AED 120,000

Net Benefit = Benefit - Disbenefit = 120000-30000 = AED 90000

Total Cost of Alternate X = AED 60551.31

Benefit/ Cost Ratio = 90000/60551.31 = 1.486

Hence option E is correct

Answer d)

Total Benefit from Alternate Y = AED 150,000

Net Benefit = Benefit - Disbenefit = 150000-10000 = AED 140000

Total Cost of Alternate Y = AED 43740.44

Benefit/ Cost Ratio = 140000/43740.44 = 3.2

Hence option F is correct

Answer e)

Incremental Benefit from X to Y = Benefit Y - Benefit X = 140000 - 90000 = 50000

Incremental Cost from X to Y = Cost Y - Cost X = 43740.44 - 60551.31 = -16810.87

Incremental Benefit/ Cost = 50000/ (-16810.87) = -2.97

Hence option J is correct

Answer f)

Since Alternate Y has higher Benefit Cost ratio Alternate Y should be chosen

Hence option B is correct

Rahul Sunny answered 1 year ago
Next > < Previous

Related Solutions

Two alternatives are under consideration. The first alternative will cost $100,000, require $20,000 in maintenance and...
Two alternatives are under consideration. The first alternative will cost $100,000, require $20,000 in maintenance and operation costs each year, and a life cycle of 4 years. The second alternative will cost $300,000, require $5,000 in maintenance and operation costs each year and a life of 6 years. Neither option will have a salvage value. In order to compute the present worth or future worth, how many years of each alternative should I use to accurately compare the two alternatives.
A newly formed firm must decide on a plant location. There are two alternatives under consideration:...
A newly formed firm must decide on a plant location. There are two alternatives under consideration: locate near the major raw materials or locate near the major customers. Locating near the raw materials will result in lower fixed and variable costs than locating near the market, but the owners believe there would be a loss in sales volume because customers tend to favor local suppliers. Revenue per unit will be $175 in either case. Omaha Kansas City Annual fixed costs...
The Thunderbird Winery must replace its present grape pressing equipment. Two alternatives are under consideration, the...
The Thunderbird Winery must replace its present grape pressing equipment. Two alternatives are under consideration, the Quick-Skwish and the Stomp-Master. The Thunderbird Winery has a Minimum Attractive Rate of Return of 4%. Which machine should be chosen? (use NPW Method) Quick-Skwish Stomp-Master Initial Cost $250,000 $400,000 1st Year Operating Expense $ 18,000 $ 12,500 Operating Expense Gradient (begins in year 2) $2000 $1,000 Salvage Value $ 25,000 $ 40,000 Useful Life (years)           5            10 Complete the problem using...
Q1)​A company is considering two location alternatives for a new facility. The management has identified the...
Q1)​A company is considering two location alternatives for a new facility. The management has identified the relevant factors for choosing a location and scored the non-quantitative factors as shown below. FACTOR WEIGHT LOCATION A LOCATION B Labor availability 20 80 95 Supplier network 20 90 85 Quality of life 15 95 100 Initial fixed cost 5 Operating cost 35 Business friendliness 5 50 90 Initial fixed cost and operating cost are quantitative factors. The firm management is undecided about how...
The machines shown below are under consideration for an improvement to an automated candy bar wrapping...
The machines shown below are under consideration for an improvement to an automated candy bar wrapping process. Machine C Machine D First cost, $ –50,000 –65,000 Annual cost, $/year –10,000 –15,000 Salvage value, $ 12,000   25,000 Life, years 4 7 1.) Based on the data provided and using an interest rate of 8% per year, the Capital Recovery “CR” of Machine C is closest to: (All the alternatives presented below were calculated using compound interest factor tables including all decimal...
The estimates shown are for a bridge under consideration. Use the B/C ration method at an...
The estimates shown are for a bridge under consideration. Use the B/C ration method at an interest rate of 6% per year to determine which bridge, if either , should be built. East Location West Location Initial Cost, $ 11,000,000 27,000,000 Annual M&O, $/year 100,000 90,000 Benefits $/year 990,000 2,400,000 Disbenefits $/year 120,000 100,000 Life, years infinity infinity
1) The machines shown below are under consideration for an improvement to an automated candy bar...
1) The machines shown below are under consideration for an improvement to an automated candy bar wrapping process. Determine which machine should be selected on the basis of an Annual Worth Analysis using an interest rate of 10% per year. (50 points) (Remember to include complete calculations for AWmachine C, AWmachine D, and selection) Machine C Machine D First cost, $ –40,000 –75,000 Annual cost, $/year –15,000 –10,000 Salvage value, $ 12,000 25,000 Life, years 3 6 Chapter 7_Rate of...
The machines shown below are under consideration for an improvement to an automated candy bar wrapping...
The machines shown below are under consideration for an improvement to an automated candy bar wrapping process. Determine which machine should be selected on the basis of an Annual Worth Analysis using an interest rate of 8% per year. (50 points) Machine C Machine D First cost, $ –40,000 –65,000 Annual cost, $/year –10,000 –12,000 Salvage value, $ 12,000 25,000 Life, years 3 6
Five mutually exclusive cost alternatives that have infinite lives are under consideration for decreasing the fruit-bruising...
Five mutually exclusive cost alternatives that have infinite lives are under consideration for decreasing the fruit-bruising rates of a thin skin-fruit grading and packing operation (peaches, pears, apricots, etc.). The initial costs and cash flows of each alternative are available. If the MARR is 15% per year, the one alternative to select is: Alternative A B C D E Initial cost, $ −15,000 −12,000 −9,000 −14,000 −11,000 Cash flow, $ per year −300 −900 −1400 −700 −1000 A B D...
Northeastern Insurance Company is considering opening an office in the U.S. The two cities under consideration...
Northeastern Insurance Company is considering opening an office in the U.S. The two cities under consideration are Philadelphia and New York. The factor ratings​ (higher scores are​ better) for the two cities are given in the following table.                                                                                                          Factor Weight PhiladelphiaPhiladelphia New YorkNew York Customer convenience 0.25 75 75 Bank accessibility 0.20 40 85 Computer support 0.20 90 70 Rental costs 0.15 85 50 Labor costs 0.10 80 50 Taxes 0.10 90 55 Based on the given​ information, the...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT