Question

Using benefit-cost ratio analysis, determine which one of the three mutually exclusive alternatives should be selected.
Each alternative has a 10-year useful life. Assume a 20% MARR.
A B C
First cost $560 $340 $120
Uniform annual benefit 140 100 40
Salvage value 40 0 0

Answer 1

Answer:

project C

Explanation:

20% MARR

                                                     A                B                C

First cost                                  $560          $340          $120

Uniform annual benefit           $140           $100           $40

Salvage value                           $40                 0               0

yearly cash flows                 1 - 9 $140  1 - 10 $100   1 - 10 $40

                                               10 $180

Using an excel spreadsheet I calculated the present value of the project's cash flows:                              $593.41    $419.25     $167.70

all the NPVs are positive:        $33.41       $79.25      $47.70

since we are going to apply a benefit-cost analysis, we must determine the return on investment (ROI) = net profit (or NPV in this case) / investment

• ROI A = $33.41 / $560 = 5.97%
• ROI B = $79.25 / $340 = 23.31%
• ROI C = $47.70 / $120 = 39.75%

Since the return on investment is higher for project C, then that project should be selected.