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27 October, 16:44

A water utility is planning to construct a grease treatment facility so that local haulers will not have to transport grease to a city 550 km away. The facility will cost $400,000 to build and $160,000 per year to operate. Benefits to the haulers and restaurant owners (through reduced costs) are expected to be $250,000 per year. If the facility will have a 10-year life, the B/C ratio at 6% per year is closest to:

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  1. 27 October, 17:04
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    The B/C ratio at 6% per year is closest to 1.17

    Explanation:

    In order to calculate the B/C ratio at 6% per year we would have to make first the following calculations:

    Present Worth (PW) of annual operating cost (excel formula) = PV (0.06,10,160000,0) = $1,177,613.93

    PW of annual benefit (excel formula) = PV (0.06,10,250000,0) = $1,840,021.76

    Present cost (at beginning of project) = $400,000

    Therefore, to calculate the B/C ratio at 6% we would use the following formula:

    B/C ratio at 6%=PW of benefits-PW of disbenefits/Initial cost+PW of operating and maintenance-PW of salvage value

    B/C ratio = ($1,840,021.76 - 0) / ($400,000 - $1,177,613.93) = 1.17
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