Answer:
the correct answer is option (b).
Explanation:
Equivalent annual benefits and annual cost of each project is provided.
Calculate B-C ratio of project A -
Annual benefits = $1,800,000
Annual costs = $2,000,000
B-C ratio = Annual benefits/Annual costs = $1,800,000/$2,000,000 = 0.90
The B-C ratio of Project A is 0.90.
Calculate B-C ratio of project B -
Annual benefits = $5,600,000
Annual costs = $4,200,000
B-C ratio = Annual benefits/Annual costs = $5,600,000/$4,200,000 = 1.33
The B-C ratio of Project B is 1.33.
Calculate B-C ratio of project C -
Annual benefits = $8,400,000
Annual costs = $6,800,000
B-C ratio = Annual benefits/Annual costs = $8,400,000/$6,800,000 = 1.24
The B-C ratio of Project C is 1.24.
Calculate B-C ratio of project D -
Annual benefits = $2,600,000
Annual costs = $2,800,000
B-C ratio = Annual benefits/Annual costs = $2,600,000/$2,800,000 = 0.93
The B-C ratio of Project D is 0.93.
Calculate B-C ratio of project E -
Annual benefits = $6,600,000
Annual costs = $5,400,000
B-C ratio = Annual benefits/Annual costs = $6,600,000/$5,400,000 = 1.22
The B-C ratio of Project E is 1.22.
It has been stated that the agency is willing to invest money in any project as long as the B-C ratio is at least one.
The B-C ratio of project A and D are less than 1. So, they will not be considered.
Out of remaining three project, B-C ratio is highest in the case of Project B.
So, Project B will be selected.
Hence, the correct answer is option (b).
