a. Based on PW method, Design Z is more economical. . The modified B/C ratio of Design Y is The modified B/C ration of Design Z is (Round to two decimal places) (Round to two decimal places) The incremental B/C ratio is (Round to two decimal places) Therefore, based on the B/C ratio method, Design Z is more economical Investment cost Annual revenue Annual cost Useful life Salvage value Net PW Design Y $140,000 $57,659 $17,618 15 years $14,700 $135,399 Design Z $275,000 $96,354 $31,687 15 years $33,000 $171,467
a. Based on PW method, Design Z is more economical. . The modified B/C ratio of Design Y is The modified B/C ration of Design Z is (Round to two decimal places) (Round to two decimal places) The incremental B/C ratio is (Round to two decimal places) Therefore, based on the B/C ratio method, Design Z is more economical Investment cost Annual revenue Annual cost Useful life Salvage value Net PW Design Y $140,000 $57,659 $17,618 15 years $14,700 $135,399 Design Z $275,000 $96,354 $31,687 15 years $33,000 $171,467
Chapter2: Productions Possibilities, Opportunity Costs, And Economic Growth
Section: Chapter Questions
Problem 17SQ
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Question
Transcribed Image Text:a. Based on PW method, Design Z is more economical.
b. The modified B/C ratio of Design Y is
The modified B/C ration of Design Z is
(Round to two decimal places)
(Round to two decimal places)
c. The incremental B/C ratio is (Round to two decimal places)
Therefore, based on the B/C ratio method, Design Z is more economical
d. The discounted payback period of Design Y is
The discounted payback period of Design Z is
years (Round to one decimal place)
years (Round to one decimal place)
Investment cost
Annual revenue
Annual cost
Useful life
Salvage value
Net PW
Therefore, based on the payback period method, Design y would be preferred.
(e) Why could the recommendations based on the payback period method be different from the other two methods?
ⒸA. because the payback period method ignores the cash flows after the payback period
O B. because the payback period gives more weight to the cash flows after the payback period
C
Design Y
Design Z
$140,000 $275,000
$57,659
$96.354
$17.618
$31,687
15 years
$33,000
15 years
$14,700
$135,399
$171,467
Expert Solution
Step 1
Given
| Design Y | Design Z | |
| Investment cost | $140,000 | $275,000 |
| Annual revenue | $57,659 | $96,354 |
| Annual Cost | $17,618 | $31,687 |
| Useful life | 15 years | 15 years |
| Salvage value | $14,700 | $33,000 |
| NPV ( Net present worth or value) | $135,399 | $171,467 |
The design which has a higher net present worth will be more economical.
The formula for modified B/C ratio:
The formula for incremental B/C ratio:
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