Two relatively inexpensive alternatives are available for reducing potential earthquake damage at a top secret government research site. The cash flow estimates for each alternative are given below. At an interest rate of 8% per year, use the B/C ratio method to determine which one should be selected. Use a 20-year study period, and assume the damage costs would occur in the middle of the study period, that is, in year 10. Alternative 1 Alternative 2 Initial cost, $ 600,000 1,100,000 Annual maintenance, $/year 50,000 70,000 Potential damage costs, $ 950,000 250,000 PW of Alt. 1: PW of Alt 2: Which Alternative would you recommend?

Two relatively inexpensive alternatives are available for reducing potential earthquake damage at a top secret government research site. The cash flow estimates for each alternative are given below. At an interest rate of 8% per year, use the B/C ratio method to determine which one should be selected. Use a 20-year study period, and assume the damage costs would occur in the middle of the study period, that is, in year 10. Alternative 1 Alternative 2 Initial cost, $ 600,000 1,100,000 Annual maintenance, $/year 50,000 70,000 Potential damage costs, $ 950,000 250,000 PW of Alt. 1: PW of Alt 2: Which Alternative would you recommend?

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

Two relatively inexpensive alternatives are available for reducing potential earthquake damage at a top secret government research site. The cash flow estimates for each
alternative are given below. At an interest rate of 8% per year, use the B/C ratio method to determine which one should be selected. Use a 20-year study period, and
assume the damage costs would occur in the middle of the study period, that is, in year 10.
Alternative 1 Alternative 2
Initial cost, $
600,000
1,100,000
Annual maintenance, $/year
50,000
70,000
Potential damage costs, $ 950,000
250,000
PW of Alt. 1:
PW of Alt 2:
Which Alternative would you recommend?

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Step 1: Define benefit-cost ratio:-

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Step 2: Calculate PW of Altenative 1 & 2:-

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Step 3: Calculate B/C Ratio:-

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