**Investment Analysis Problem Set**An investor is considering two investments for his portfolio:- **Investment A** requires an initial capital of $11,100. It will generate annual revenues of $3,900 and annual costs of $560, with a salvage value of $5,000 at the end of 5 years.- **Investment B** requires an initial capital of $17,000. It generates annual revenues of $8,000 and annual costs of $1,100, with a salvage value of $9,200 at the end of 5 years.If the investor's Minimum Acceptable Rate of Return (MARR) is 18% per year, answer the following two questions:1. Calculate the **conventional Benefit/Cost (B/C) ratio** of Investment A. - A. -0.86 - B. 0.64 - C. -0.36 - D. 1.14 *(correct option selected)*2. Calculate the **incremental conventional B/C ratio** of Investment B over A. - A. 3.23 - B. 1.73 - C. 3.73 - D. 2.23(Note that explanation of calculations and analysis for understanding the investment choices would follow in the educational content.)

The cash flow of Plan A and Plan B is summarized in the table below:Plan APlan BInitial investment11,10017,000Annual revenue3,9008,000Annual cost5601,100Salvage value5,0009200Service life5 years5The benefit-cost ratio is a financial metric used to evaluate the desirability of an investment or project. Based on annual worth, the benefit-cost ratio of a project is calculated by dividing total annual benefit by total annual cost. For a conventional B/C ratio, annual costs are added in the denominator, and salvage value is substracted in denominator. Mathematically:The total cost of plan A is the sum of capital recovery cost and annual cost. Here FC denotes the first cost, SV denotes salvage value, and n denotes the life of the plan, i is equal to MARR.For Plan A:For Plan B:The annual benefit of each plan is equal to the annual revenue.The table below summarizes the calculated annual worth of benefits and costs:Plan APlan BAnnual benefit3,9008,000Annual total cost3,410.665,250.28Using the formula of the conventional BC ratio, B/C ratio for plan A is calculated asThe conventional B/C ratio for plan A is 1.14, option D is correct. For Plan B:Plan B is a higher-cost alternative than plan A. Therefore, plan B is the challenger to plan A.Incremental B/C ratio of plan B over plan A is calculated asThe incremental BC ratio of plan B over plan A is 2.23Alternative B is the best alternative. The conventional B/C ratio for plan A is 1.14, option D is correct. The incremental BC ratio of plan B over plan A is 2.23. Option D is correct.

Business

Economics

An investor is considering two investments for his portfolio. Investment A requires an initial capital of $11,100. It will generate annual revenues of $3,900 and annual costs of $560 with a salvage value of $5,000 at the end of 5 years On the other hand, Investment B requires an initial capital of $17,000, generates annual revenues of $8,000, annual costs of $1,100 with a salvage value of $9,200 at the end of 5 years. If the investor's MARR is 18% per year, answer the following two questions: Calculate the conventional B/C ratio of Investment A OA. -0.86 OB. 0.64 OC. -0.36 OD. 1.14 Calculate the incremental conventional B/C ratio of Investment B over A. OA. 3.23 OB. 1.73 OC. 3.73 OD. 2.23 (...)

An investor is considering two investments for his portfolio. Investment A requires an initial capital of $11,100. It will generate annual revenues of $3,900 and annual costs of $560 with a salvage value of $5,000 at the end of 5 years On the other hand, Investment B requires an initial capital of $17,000, generates annual revenues of $8,000, annual costs of $1,100 with a salvage value of $9,200 at the end of 5 years. If the investor's MARR is 18% per year, answer the following two questions: Calculate the conventional B/C ratio of Investment A OA. -0.86 OB. 0.64 OC. -0.36 OD. 1.14 Calculate the incremental conventional B/C ratio of Investment B over A. OA. 3.23 OB. 1.73 OC. 3.73 OD. 2.23 (...)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

**Investment Analysis Problem Set**

An investor is considering two investments for his portfolio:

- **Investment A** requires an initial capital of $11,100. It will generate annual revenues of $3,900 and annual costs of $560, with a salvage value of $5,000 at the end of 5 years.

- **Investment B** requires an initial capital of $17,000. It generates annual revenues of $8,000 and annual costs of $1,100, with a salvage value of $9,200 at the end of 5 years.

If the investor's Minimum Acceptable Rate of Return (MARR) is 18% per year, answer the following two questions:

1. Calculate the **conventional Benefit/Cost (B/C) ratio** of Investment A.
- A. -0.86
- B. 0.64
- C. -0.36
- D. 1.14 *(correct option selected)*

2. Calculate the **incremental conventional B/C ratio** of Investment B over A.
- A. 3.23
- B. 1.73
- C. 3.73
- D. 2.23

(Note that explanation of calculations and analysis for understanding the investment choices would follow in the educational content.)

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