Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
In the attached pictures, there is a solution. Kindly provide a detailed solution on how it came up with the answer.
![2. Tempe is considering four mutually exclusive public-works projects. Their costs
and benefits are presented in the table below. Each project has a useful life of 50
years and the MARR is 12% per year. Which of the projects, if any, should be
selected?
A
C
D
Capital investment $23,000,000 $18,000,000 $31,000,000 $26,000,000
Annual op. and
maint. cost
1,800,000
1,200,000
2,100,000
2,000,000
Market value
2,400,000
2,200,000
4,000,000
3,100,000
Annual benefit
5,000,000
4,500,000
6,500,000
5,800,000](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F855faee7-4ac6-4754-b3b0-ae1cd861b80e%2Fccc8678e-84a1-4337-beb3-a583f5f44832%2Fp32fzxv_processed.jpeg&w=3840&q=75)
Transcribed Image Text:2. Tempe is considering four mutually exclusive public-works projects. Their costs
and benefits are presented in the table below. Each project has a useful life of 50
years and the MARR is 12% per year. Which of the projects, if any, should be
selected?
A
C
D
Capital investment $23,000,000 $18,000,000 $31,000,000 $26,000,000
Annual op. and
maint. cost
1,800,000
1,200,000
2,100,000
2,000,000
Market value
2,400,000
2,200,000
4,000,000
3,100,000
Annual benefit
5,000,000
4,500,000
6,500,000
5,800,000
![В — С %-
AW (benefits of the proposed projects)
AW (total cos ts of the proposed projects)
AW (B)
CR + AW (O and M)
where CR is capital recovery or investment
A
В
D
Capital Investment
$ 23,000,000
$18,000,000
$31,000,000
$26,000,000
Annual O&M
$1,800,000
$1,200,000
$2,100,000
$2,000,000
Annual Benefit
$5,000,000
$4,500,000
$6,500,000
$5,800,000
CAPITAL RECOVERY at
0.1204
$2,769,200
$2,167,200
$3,732,400
$3,130,400
|(A/P, 12%, 50 years)
B- C
$5,000,000
$2,769,200 + $1,800,000
$4,500,000
$2,167,200 + $1,200,000
$6,500,000
$3,732,400 + $2,100,000
$5,800,000
$3,130,400 + $2,000,000
1.094
1.336
1.114
1.130
Since all the projects are greater than 1 they are all good for the company but the best one is ALTERNATE B
with maximum B-C ratio. Hence, the company should choose Alternative B as per this method.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F855faee7-4ac6-4754-b3b0-ae1cd861b80e%2Fccc8678e-84a1-4337-beb3-a583f5f44832%2F3dclm1k_processed.jpeg&w=3840&q=75)
Transcribed Image Text:В — С %-
AW (benefits of the proposed projects)
AW (total cos ts of the proposed projects)
AW (B)
CR + AW (O and M)
where CR is capital recovery or investment
A
В
D
Capital Investment
$ 23,000,000
$18,000,000
$31,000,000
$26,000,000
Annual O&M
$1,800,000
$1,200,000
$2,100,000
$2,000,000
Annual Benefit
$5,000,000
$4,500,000
$6,500,000
$5,800,000
CAPITAL RECOVERY at
0.1204
$2,769,200
$2,167,200
$3,732,400
$3,130,400
|(A/P, 12%, 50 years)
B- C
$5,000,000
$2,769,200 + $1,800,000
$4,500,000
$2,167,200 + $1,200,000
$6,500,000
$3,732,400 + $2,100,000
$5,800,000
$3,130,400 + $2,000,000
1.094
1.336
1.114
1.130
Since all the projects are greater than 1 they are all good for the company but the best one is ALTERNATE B
with maximum B-C ratio. Hence, the company should choose Alternative B as per this method.
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