Question

Use the following information to answer the question(s) below. A company near a large city is required to keep its smokestack pollution to new lower levels, costing the company $2 million in additional equipment (which will last at least 10 years) and $100,000 a year in additional labor. Lowering the air pollutants in the region is expected to save $4 million in medical expenses in the affected region over the next 10 years. Over this 10-year period, the benefit to cost ratio is

Answer 1

Answer:

Over this 10-year period, the benefit to cost ratio is:

= 1.33.

Explanation:

a) Data and Calculations:

Cost of additional anti-pollution equipment = $2 million

Estimated useful life of the equipment = 10 years

Additional annual labor cost for equipment usage = $100,000

This gives a total labor cost of $1 million over the 10-year period.

Therefore, the total cost = $3 million

Savings (benefits) from lowering the air pollutants in the region = $4 million in medical expenses.

The benefit-to-cost ratio (BCR) = $4/$3 = 1.33

b) The Benefit-to-cost ratio (BCR) is a cost–benefit analysis that summarizes the value-for-money of a project by expressing the relationship between the project's benefits and costs in monetary terms. The BCR shows the future profitability of investment alternatives or options. It is normally expressed in terms of net present value.