Question

A city government is considering two types of​ town-dump sanitary systems. Design A requires an initial outlay of ​$400000 with annual operating and maintenance costs of ​$50000 for the next 15 ​years; design B calls for an investment of ​$300000 with annual operating and maintenance costs of ​$80000 per year for the next 15 years. Select the better system based on BC analysis at 8% social discount rate (same as MARR).

Answer 1

Answer:

We will be considering design A.

Explanation:

By applying B/C analysis following interpretation take place:

For Design A:

Investment (I) = USD 400,000

Cost (C) = USD 50,000 (P/A) which is (8%,15)

we will get USD 427,974

For Design B:

Investment (I)= USD 300,000

Cost (C) = USD 80,000 (P/A) which is (8%,15)

we will get USD 684,758

• We will select the most effective alternative based on their least cost which is (I+C) or their modified benefit to cost ratio. Using the modified B/C ratio which is:

B/C modified:

= (Cost of A- Cost of B) ) / (Investment of A - Investment of B)  

= (427,974 - 684,758))/(400,000-300,000)

= 2.56 Answer