Answer:
A. Alternative 1 1.88
Alternative 2 1.73
Incremental Analysis 1.34
B. Alternative 2
Explanation:
A. Calculation to determine the benefit cost ratio of each machine,
First step is to calculate the present value of each Alternative
ALTERNATIVE 1
Calculation for alternative 1 Benefit and cost
Benefits = ($1500)(P/A, 8%, 15)
Benefits= ($1500)(8.5595)
Benefits= $12,839
Cost = $7,000 – ($500)(P/F, 8%,15)
Cost= $7,000 – ($500)(0.3152)
Cost = $6842
Now let calculate Alternative 1 Ratio of Benefit to Cost using this formula
Ratio of Benefit to Cost = Benefit/Cost
Let plug in the formula
Ratio of Benefit to Cost=$12,839/$6842
Ratio of Benefit to Cost= 1.88
Therefore the benefit cost ratio for Alternative 1 is 1.88
ALTERNATIVE 2
Calculation for alternative 2 Benefit and cost
Benefits = ($1900)(P/A, 8%,15)
Benefits= ($1900)(8.5595)
Benefits= $16,263
Cost = $9000 + ($1250)(P/F,8%,15)
Cost= $9000 + ($1250)(0.3152)
Cost=$9394
Now let calculate Alternative 1 Ratio of Benefit to Cost using this formula
Ratio of Benefit to Cost = Benefit/Cost
Let plug in the formula
Ratio of Benefit to Cost= $16,263/$9394
Ratio of Benefit to Cost = 1.73
Therefore the benefit cost ratio for Alternative 2 is 1.73
B. In order to know which machine should the company choose we have to determine the incremental analysis for each of the machine
Incremental Analysis = ($16,263- $12,839)/ ($9394 - $6842)
Incremental Analysis= 1.34
Based on the above calculation for Incremental Analysis we can see that the Incremental Analysis is greater than 1 which means that the machine that the company should choose is ALTERNATIVE 2
