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koban [17]
3 years ago
6

A tax exempt municipality is considering the construction of a new municipal waste water treatment facility. Two different sites

have been selected as technically, politically, socially, and financially feasible. The city council uses 6% interest rate for all analyses for public projects. The expected cash flow for the two alternatives are as follow:
Year Alt. A Alt. B
0 - $16,161,644 - $27,211,376
1 - 75 $2,111,404/year $3,019,639/year

What is the incremental benefit/cost ratio?
Business
1 answer:
In-s [12.5K]3 years ago
5 0

Answer:

The incremental benefit/cost ratio for Alt A is 2.15 and The incremental benefit/cost ratio for Alt B is 1.35

Explanation:

In order to calculate the incremental benefit/cost ratio for both of the two alternatives we would have to make the following calculations:

For ALT A

PV of benefits = $2,111,404 * [1-(1.06)^-75]/0.06 = $34,744,943.5

Therefore, incremental benefit cost ratio = $34,744,943.5/$16,161,644 = 2.15

The incremental benefit/cost ratio for Alt A is 2.15

For ALT B

incremental benefits = ($3,019,639 -$2,111,404) * [1-(1.06)^-75]/0.06 = $14,945,777.2

incremental benefits = $27,211,376 - $16,161,644 = $11,049,732

Therefore, incremental benefit cost ratio = $14,945,777.2/$11,049,732 = 1.35

The incremental benefit/cost ratio for Alt B is 1.35

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