Answer:
0.71
Explanation:
The benefit cost ratio is used to determine the profitability of an investor. It is determined by dividing the present value of benefit by the present value of cost
Benefit cost ratio (BC) = present value of benefits / present value of costs
if BC is greater than 1, the project is profitable
If BC is less than 1, the project is not profitable
Present value is the sum of discounted cash flows
Present value can be calculated using a financial calculator
Present value of the benefits
Cash flow in year 1 = $18,000
Cash flow in year 2 = $18,000 + 3500 = $21500
Cash flow in year 3 = $18,000 + (3500 x 2) = $25,000
Cash flow in year 4 = $18,000 + (3500 x 3) = $28500
Cash flow in year 5 = $18,000 + (3500 x 4) = $32,000
Cash flow in year 6 = $18,000 + (3500 x 5) = $35,500
Cash flow in year 7 = $18,000 + (3500 x 6) = $39,000
Cash flow in year 8 = $18,000 + (3500 x 7) = $42,500
Cash flow in year 9 = $18,000 + (3500 x 8) = $46,000
Cash flow in year 10 = $18,000 + (3500 x 9) = $49500
Cash flow in year 11 = $18,000 + (3500 x 10) = $53,000
Cash flow in year 12 = $18,000 + (3500 x 11) = $56,500
I = 12 %
PV = $202,331.70
Present value of the cost
Cash flow in year 0 = $25,000 + $150,000 = $175,000
Cash flow in year 1 to 12 = $17,500.
I = 12 %
PV = $283,401.55
B/C ratio = $202,331.70 / $283,401.55 = 0.71
To find the PV using a financial calculator:
1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.
2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.
3. Press compute
