Question

this comparison is being made for a state government that mandates the use of benefit/cost criteria at an interest rate of 8%. Which ratio(s) should be calculated, and why? Based on your calculations, which mutually exclusive alternative should be chosen? Project B can be repeated in 5 years.

Alternative	A	B
First cost	$200,000	$225,000
Annual O&M	$25,000	$15,000
Salvage Value	$0	$50,000
Life	10 years	5 years
Annual User Benefit	$75,000	$85,000

Answer 1

Benefit-cost ratio, should be calculated, because it considers the benefits and cost associated with each alternative ans it is the criteria required by the decision makers.

For alternative A:

Uniform first annual cost = 200000*(A/P, 8%, 10) = 200000*.1490

Uniform first annual cost = $29800

Benefit-cost ratio = 75000/(29800+25000)

Benefit-cost ratio = 1.37

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For alternative B:

Uniform first annual cost = 225000*(A/P, 8%, 5) = 225000*.2505

Uniform first annual cost = 56362.5

annual uniform salvage value = 50000*(A/F, 8%, 5) = 50000*.1705

annual uniform salvage value = $8522.82

Benefit-cost ratio = 85000/(56362.5 + 15000 - 8522.82)

Benefit-cost ratio = 1.35

Since Benefit-cost ratio for alternative A is higher than that of alternative B, so alternative A should be selected.