10212-10-29FPP

AID:1825 | 16/10/2013

Given information:

Investment required is given as $60,000.

Annual maintenance costs is given as $5,000
Savings in the third year is given as $24,000
MARR is given as 12 percent per year.

Present value of benefit

Present value of benefit can be calculated using following formula:
1 i n 1
Present value Savings

i 1 i n

1 i

(1)

Substitute the respective values in Equation (1), this is done below:

1 0.12 1
1

14
2

0.12 1 0.12
1

0.12

Present value 24,000

14

1.12 1
1

14
2

0.12 1.12
1.12

24,000

14

4.887 1
1

0.12 4.887 1.2544

1
3.887
24,000

0.58644 1.2544

24,000

24,000 6.628 0.797

126,780.384

Present value of cost

Present value of cost can be calculated using following formula:
1 i n 1
Present value Savings

i 1 i n

1 i

(2)

Substitute the respective values in Equation (2), this is done below:

1 0.12 1
16
0.12 1 0.12

Present value 60,000 5,000

16

1.12 1
16
0.12 1.12

60,000 5,000

16

6.130 1

0.12 6.130
5.130
60,000 5,000

0.7356
60,000 5,000 6.97
60,000 5,000

60,000 34869.494
94,869.49

Conventional B/C ratio

Conventional Benefit cost ratio can be calculated using following formula. This is done
below:
B/C

Present value of Benefit

Present value of Cost

(3)

Substitute the respective values in Equation (3) to find the conventional B/C ratio:
126,780.384
94,869.49
1.34

B/C

B/C ratio is calculated as 1.34.Hence, option b is correct.