Question

For the data below, select the best alternative using incremental B/C ratio (benefit-cost ratio) analysis.

Note that MARR= 12%.

X | Y | Z | |
---|---|---|---|

Initial Cost | $500 | $2000 | $1,200 |

Annual benefit | 100 | 500 | 400 |

Salvage value | 500 | 500 | 500 |

Life | 6 years | 6 years | 6 years |

EXPERT ANSWER

First, find the disouncted benefit (annual benefit and salvage value) and discounted cost (initial cost — no need to discount because it occurs at time 0) for each project:

{eq}Discounted Benefit_X = 100 * cfrac{1-(1/(1.12)^6)}{0.12} + cfrac{500}{1.12^6}= 664.46 \

Discounted Benefit_Y