Question

Flood damage in the Brush Creek area averages $7,000 annually. Civil engineers with floodplain expertise have designed a series of small dams to restrain the flow. They will cost $25,000 and will involve annual maintenance charges of $500. What is the anticipated benefit/cost ratio if the interest rate is 6 %, the service life is 10 years, and the salvage value is $5,000

Answer 1

Answer:

1.89

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 benefits

Cash flow each year from year 1 to 9 =  $7,000

Cash flow in year 10 = $7000 + 5000 = $12,000

I = 6%

PV = $54,312.58

Present value of costs

Cash flow in year 0 = $25,000

Cash flow each year from year 1 to 10 = $500

I = 6%

PV = $28,680.04

Benefit cost ratio = $54,312.58 / $28,680.04 = 1.89

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