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27 July, 06:38

The local electric company may renovate a number of substations within its system. Various costs and savings can be anticipated, depending on the type of renovation performed. Using benefit/cost analysis and an interest rate of 12%, determine which alternative should be chosen. Annual Annual Alternative First Cost Cost Savings Life A $1,100,000 $24,000 $180,000 20 years B 1,500,000 36,000 245,000 20 years C 1,750,000 41,000 295,000 20 years

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  1. 27 July, 06:56
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    Select Alternative C with benefit to cost ratio of 1.071

    Explanation:

    The cost benefit analysis is a method to compare several projects and decide which one is most feasible.

    We have three alternatives here and will compare them and decide which one to select.

    Alternative | First Cost | Annual Cost | Annual Savings | Life

    A | 1,100,000 | 24,000 | 180,000 | 20

    B | 1,500,000 | 36,000 | 245,000 | 20

    C | 1,750,000 | 41,000 | 295,000 | 20

    Alternative A:

    Total costs = First Cost + Total Annual Cost

    Total costs = 1,100,000 + 24,000 (P/A, 12%,20)

    Total costs = 1,100,000 + 24,000 (7.469)

    Total costs = 1,279,256

    Total benefits = 180,000 (P/A, 12%,20) = 180,000 (7.469) = 1,344,420

    Benefit Cost Ratio = Total benefits/Total costs

    Benefit Cost Ratio = 1,344,420/1,279,256

    Benefit Cost Ratio = 1.051

    Alternative B:

    Total costs = First Cost + Total Annual Cost

    Total costs = 1,500,000 + 36,000 (P/A, 12%,20)

    Total costs = 1,500,000 + 36,000 (7.469)

    Total costs = 1,768,884

    Total benefits = 245,000 (P/A, 12%,20) = 245,000 (7.469) = 1,829,905

    Benefit Cost Ratio = Total benefits/Total costs

    Benefit Cost Ratio = 1,829,905/1,768,884

    Benefit Cost Ratio = 1.034

    Alternative C:

    Total costs = First Cost + Total Annual Cost

    Total costs = 1,750,000 + 41,000 (P/A, 12%,20)

    Total costs = 1,750,000 + 41,000 (7.469)

    Total costs = 2,056,229

    Total benefits = 295,000 (P/A, 12%,20) = 295,000 (7.469) = 2,203,355

    Benefit Cost Ratio = Total benefits/Total costs

    Benefit Cost Ratio = 2,203,355/2,056,229

    Benefit Cost Ratio = 1.071

    Conclusion:

    Select Alternative C because it has the highest benefit to cost ratio.
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