Answer :
Answer:
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.