Engineering Economy
Engineering Economy
8th Edition
ISBN: 9780073523439
Author: Leland T Blank Professor Emeritus, Anthony Tarquin
Publisher: McGraw-Hill Education
Question
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Chapter 9, Problem 29P
To determine

Calculate incremental benefit cost ratio.

Expert Solution & Answer
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Explanation of Solution

Table -1 shows the cash flow of two different project.

Table -1

ItemRC
Initial cost (C)880,0002,900,000
Annual maintenance cost (AM)92,00030,000
Reduces flood damage (R)200,000600,000

Discount rate (i) is 8%. Time period is 20 years. Damage is prevented in the year (n1) 3, (n2) 9 and (n3) 18.

Incremental benefit cost ratio (BC) between initial alternate R and new alternate C can be calculated as follows.

BC=(RCRR)(1(1+i)n1+1(1+i)n2+1(1+i)n3)((CC+AMC((1+i)n1i(1+i)n))(CR+AMR((1+i)n1i(1+i)n)))=(600,000200,000)(1(1+0.08)3+1(1+0.08)9+1(1+0.08)18)((2,900,000+30,000((1+0.08)2010.08(1+0.08)20))(880,000+92,000((1+0.08)2010.08(1+0.08)20)))=400,000(11.259712+11.999005+13.996019)((2,900,000+30,000(4.66095710.08(4.660957)))(880,000+92,000(4.66095710.08(4.660957))))=400,000(0.793832+0.500249+0.250249)((2,900,000+30,000(3.6609570.372877))(880,000+92,000(3.6609570.372877)))=400,000(1.54433)((2,900,000+30,000(9.818136))(880,000+92,000(9.818136)))=617,732((2,900,000+294,544.08)(880,000+903,268.51))=617,732(3,194,544.08(1,783268.51))=617,7321,411,275.57=0.44

Benefit cost ratio is 0.44. Since the incremental cost benefit analysis between the initial alternative R and new alternative C is less than 1, retain the initial alternate R.

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Chapter 9 Solutions

Engineering Economy

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