Question

In: Economics

Find the Benefit Cost Ratio using the Annual Worth approach for the following problem. Capital Investment:...

Find the Benefit Cost Ratio using the Annual Worth approach for the following problem. Capital Investment: $1,000,000 Project Life: 45 years Salvage: 200,000 Interest Rate: 6% Benefits per year: $650,000 O&M Cost per year: $350,000 Disbenefits Cost per year: $200,000 Should this public project be undertaken?

Expert Solution

Initial cost = $ 1,000,000

Salvage value = $ 200,000

Interest rate = 6%

Benefit = $ 650,000 per year

O&M cost = $ 350,000 per year

Disbenefits = $ 200,000 per year

Life = 45 years

We are required to calculate the Benefit cost ratio. We will use the following formula

AWB = $ 650,000; AWOM = $ 350,000; AWD = $ 200,000

Plus in these values in the equation of BCR we get

Since, BCR is greater than 1.

Hence the project must be undertaken.

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Rahul Sunny answered 2 years ago

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