A flood control project with a life of 21 years will require an investment of $150,000...
A flood control project with a life of 21 years will require an investment of $150,000 and annual maintenance costs of $10,000. The project will provide no benefits for the first two years but will save $100,000 per year in flood damage starting in the third year. The appropriate MARR is 15% per year. What is the conventional B-C ratio with present worth for the flood control project. (Enter your answer rounded to two decimal places; i.e., x.xx)
Homework Answers
Solution :- Present value of annual benefits = 100000 * Cumulative present value factor from year 3 to year 21 at 15 % (using present value table)
= 100000 * 4.687 (approx).
= $ 468700.
Present value of annual maintenance costs = 10000 * Cumulative present value factor for 21 years at 15 % (using present value table)
= 10000 * 6.312 (approx)
= $ 63120 (approx)
Present value of cash inflows = Present value of annual benefits - Present value of annual maintenance costs.
= 468700 - 63120
= $ 405580.
Present value of initial cash outflow = $ 150000 (Given in the question)
Conventional B-C ratio = Present value of cash inflows / Present value of initial cash outflow.
= 405580 / 150000.
= 2.70 (approx).
Conclusion :- Conventional B-C ratio = 2.70 (can be mentioned as 2.70 : 1)
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