1 A county road commission is considering the purchase of two different snow plows. They have different initialcosts, operating and maintenance costs, and benefits in form of reduced labor costs over current practices, as follows:Snow Plow ASnow Plow BInitial cost$300,000$400,000lifeAnnual operations and maintenanceAnnual benefitsSalvage valueUse 10% annual interest rate10 years$45,000$150,00010 years$35,000$200,000$10,000a. Determine the benefit-cost ratios for each optionb. Determine whether the additional initial cost of snow plow B is justified by the additional benefits.

Solution Formula for benefit cost ratio =present value or the benefit / present value of cost…

Answered: Determine the benefit-cost ratios for…

Determine the benefit-cost ratios for each option Determine whether the additional initial cost of snow plow B is justified by the additional benefits.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 18P: Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting...

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Question

A county road commission is considering the purchase of two different snow plows. They have different initial
costs, operating and maintenance costs, and benefits in form of reduced labor costs over current practices, as follows:
Snow Plow A
Snow Plow B
Initial cost
$300,000
$400,000
life
Annual operations and maintenance
Annual benefits
Salvage value
Use 10% annual interest rate
10 years
$45,000
$150,000
10 years
$35,000
$200,000
$10,000
a. Determine the benefit-cost ratios for each option
b. Determine whether the additional initial cost of snow plow B is justified by the additional benefits.

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