### Problem Statement:At 10% interest, what is the equation setup for the benefit/cost ratio for the following government project?| Description | Value ||-------------------------------------|------------|| Initial Cost | $200,000 || Additional costs at the EoY 1-2 | $30,000 || Annual Benefits at the EoY 1-10 | $90,000 || Salvage Value | $40,000 || Project Life | 10 years |### Options:1. **Option A:** \[ \text{PW(Benefits)} = \text{Annual Benefits} \times (A/P, 10\%, 10) + \text{Salvage Value} \times (F/P, 10\%, 10) \] \[ \text{PW(Costs)} = \text{Initial Costs} + \text{Additional Costs} \times (A/P, 10\%, 2) \] \[ \text{B/C} = \frac{\text{PW(Benefits)}}{\text{PW(Costs)}} \]2. **Option B:** \[ \text{PW(Benefits)} = \text{Annual Benefits} \times (P/A, 10\%, 10) - \text{Salvage Value} \] \[ \text{PW(Costs)} = \text{Initial Costs} + \text{Additional Costs} \times (A/P, 10\%, 2) + \text{Salvage Value} \times (P/F, 10\%, 10) \] \[ \text{B/C} = \frac{\text{PW(Benefits)}}{\text{PW(Costs)}} \]3. **Option C:** \[ \text{PW(Benefits)} = \text{Annual Benefits} \times (P/A, 10\%, 10) \] \[ \text{PW(Costs)} = \text{Initial Costs} + \text{Additional Costs} \times (A/P, 10\%, 2) \] \[ \text{B/C} = \frac

Answered: O PW(Benefits)- Annual Benefits (A/P,…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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### Problem Statement:

At 10% interest, what is the equation setup for the benefit/cost ratio for the following government project?

| Description | Value |
|-------------------------------------|------------|
| Initial Cost | $200,000 |
| Additional costs at the EoY 1-2 | $30,000 |
| Annual Benefits at the EoY 1-10 | $90,000 |
| Salvage Value | $40,000 |
| Project Life | 10 years |

### Options:

1. **Option A:**
\[
\text{PW(Benefits)} = \text{Annual Benefits} \times (A/P, 10\%, 10) + \text{Salvage Value} \times (F/P, 10\%, 10)
\]
\[
\text{PW(Costs)} = \text{Initial Costs} + \text{Additional Costs} \times (A/P, 10\%, 2)
\]
\[
\text{B/C} = \frac{\text{PW(Benefits)}}{\text{PW(Costs)}}
\]

2. **Option B:**
\[
\text{PW(Benefits)} = \text{Annual Benefits} \times (P/A, 10\%, 10) - \text{Salvage Value}
\]
\[
\text{PW(Costs)} = \text{Initial Costs} + \text{Additional Costs} \times (A/P, 10\%, 2) + \text{Salvage Value} \times (P/F, 10\%, 10)
\]
\[
\text{B/C} = \frac{\text{PW(Benefits)}}{\text{PW(Costs)}}
\]

3. **Option C:**
\[
\text{PW(Benefits)} = \text{Annual Benefits} \times (P/A, 10\%, 10)
\]
\[
\text{PW(Costs)} = \text{Initial Costs} + \text{Additional Costs} \times (A/P, 10\%, 2)
\]
\[
\text{B/C} = \frac

Expert Solution

Step 1 Introduction

Benefit/cost ratio is calculated as Present value of benefits divided by present value of costs. Benefit/cost ratio help us to determine if we should accept the project or not.

Present value of benefits would include the annual benefits of a project and salvage value.

Present value of costs will include the initial cost and present value of additional costs.

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