Calculate the Benefit-Cost Ratio for Municipal Government Project

With interest at 10%, the benefit-cost ratio for this municipal government project is most nearly:

  Initial cost                                                                          $200,000

  Additional costs at end of years 1 & 2                                 $30,000/yr

  Benefits at end of years 1 & 2                                            $0

  Annual benefits from year's 3 to 10                                     $90,000/yr

Solution:

PW Cost   = $200,000 + $30,000 (P/A, 10%, 2)

    = $200,000 + $30,000 (1.736)

    = $252,080

PW Benefits = $90,000 (P/A, 10%, 8) (P/F, 10%, 2)     

    = $90,000 (5.335) (0.8264)     

    = $396,800

B/C = $396,800/$252,080 = 1.574