A project being considered by a local government has the following estimated benefit-cost data: a $1000 investment for the first 2 years, followed by a recurring cost of $5000 for the next 2 years, and $8000 for years 5 and 6, respectively. Additionally, the project offers benefits of $20,000, $30,000, $30,000, and $20,000 starting from the third year. With an interest rate of 10%, design an optimal solution to perform a cost-benefit analysis and conclude if the project is suitable or not.

here we calculate the benefit cost ratio by calculating the Present value of benefits and Present value of costs so the calculation as follow-Year Cash Outflow Cash Inflow 1 $1000 $0 2 $1000 $0 3 $5000 $20,000 4 $5000 $30,000 5 $8000 $30,000 6 $8000 $20000 For cost benefit analysis, we to calculate the B/C ratio ( Benefit-cost ratio) here we calculate the B/C ratio - B/C ratio = Present value of benefits / Present value of Cost Present value of benefits = $20,0000/(1+0.10)3+$30,000/(1+0.10)4+$30,000/(1+0.10)5+$20000/(1+0.10)6 * (1+0.10)-2 Present value of benefits = $54,077.54 Now we calculate the Present value of Cost as follow- Present value of Cost = [$1000/(1+0.10)1+$1000/(1+0.10)2+$5000/(1+0.10)3+$5000/(1+0.10)4+$8000/(1+0.10)5+$8000/(1+0.10)6] Present value of cost = $18390.3 so now we calculate the B/C ratio as follow= B/C ratio = $54077.54/$18390.3 B/C ratio = 2.94 The benefit cost ratio is higher than one, which suggests that the present value of benefits is higher than present value of costs. Hence the project is suitable for investment.

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Economics

A project being consider by a local government has the following estimated benefit – cost data $1000 investment for the first 2 years and then recurring cost of $5000 for the coming 2 years and $8000 for year 5& 6 respectively. Also there are benefits of $20,000, $30,000, $ 30,000 and $20,000 starting from the third year. Consider the

A project being consider by a local government has the following estimated benefit – cost data $1000 investment for the first 2 years and then recurring cost of $5000 for the coming 2 years and $8000 for year 5& 6 respectively. Also there are benefits of $20,000, $30,000, $ 30,000 and $20,000 starting from the third year. Consider the

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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