Question

1. Compare the following alterntives given a market rate of 5.45% per year and an inflation rate of 3% per year. Use first the B/C method to determine feasibility and then the incremental B/C method to determine the oprimum level of investment.

Alt	Construction Cost $	Annual Benefits $/yr	Life yrs
A	105,000	40,000	5
B	230,000	52,000	6
C	350,000	64,000	7
D	600,000	100,000	8

Answer 1

Cumulative py falor Net 40.000 t Comparison at market rate 5.45% Alt Cost Benefix/ yr I life your cumulativne Benefit 1 Profit from tpe Pouton A losoo s 4.276 / 13 1,183.61 26,183.65 230,000 52,000 15.003 260,156 / 30,156 350,000 64,000 2 9.693 364,3.52 14,352 600.000 100,000 8 16.347 634,700 / 34,700 12 Alt D is the best investiment option since it has highest profit of $34,700 2 Incremental Approach Alt A year o 1 2 3 4 5 Costa 105,000 Benefsir - 40.000 41,200 42,436 43,009.08 45,020.35 Pu Partor 0.948 0.899 0.853 0.809 0.767 Net profit can 37920 37,038.8 36197.91 33360.64 34,50.61 or Loyd I Total Prosit = $76047.96 Alt B - year 230,000 a Cost Benefit 2 3 4 5 6 $2,000 $3,560 55,166-8 56821-80 58526:45 63282: 0.948 0.899 0.853 0.809 0.767 0.721 49,296 48,150.44 47,057.28 45968.8 44889.7943825 = $49, 187.5 er favor , gatal Preset (230,000) Te cost Total Profit

Brreter pirou 350.000 64000 65,920 573972 69934-53 72032-56 74193.54 76419.35 o aug 0.299 0.858.859 2.767 0.727 0.690 (350,000) 60,672 59262.0837916-79 5657703 55248.9753938.70 52329.36 Brer Prosta $ 105, 607.01 Year cost 600,000 Benefit PV Favor 2 3 1 1 100.000 103000 106.090 109 2927 12,550 -39115,927.41 0.948 0.8000-853 0.809/0.767 0.727 I 0 000 au 800 92.597 7049777 8340161 86,326-53 7 707753201 30250 84,279.23 Yeaor) 7 8. Benefit 119,405-23 122,987.39 0.690 0.654 82,389 661 80433:75 Profit = $99,722.51 Alt C is the best inne it has eighest profit of $ 105,607-01