B/C Ratio

[winner9459]

I cannot reach at a valid answer, may be my reasoning is flawed.

Here is how I tried to solve it:

1) I thought that Q is asking for B/C ratio of the alternative to the B/C ratio of the original

2) The output and revenue are the same, which means the benefits are the same, thus cancel out, therefore we are left with the ratio of Cost (Original)/Cost (Alternative).

Original cost is the capitalized cost, 2.5 million $

Alternative cost: calculated it to be around 949,000

and the ratio as nearly 2.6, which is not there in options. I know I did something wrong....Please help me correcting it.

Thanks.

 

[sac_engineer]

Cost = 10000 - 1000(P|F, 10%, 5yrs) = 9379.1 (added start cost - present value salvage)

Benefit = (250000 - 248000) * (P|A, 10, 5) = 7581.6 (difference in annual cost in present value)

B/C = 0.808

 

[IlPadrino]

Cost = 10000 - 1000(P|F, 10%, 5yrs) = 9379.1 (added start cost - present value salvage)
Benefit = (250000 - 248000) * (P|A, 10, 5) = 7581.6 (difference in annual cost in present value)

B/C = 0.808

I think you should account for the benefit of not spending the $10000 and banking the 10% rate of return as an opportunity cost of the alternative.