10212-10-26FPP

AID: 1825 | 16/10/2013

Given Information:

Capital investment in Truck X and Truck Y is given $50,000 and $64,000

Maintenance cost of Truck X and Truck Y is given as $6,000 and $5,000
Useful life of Truck X and Truck Y is given as 6 years and 6 years respectively
Reduction in fire damage in Truck X and Truck Y per year is given as $20,000
and $22,000.
Money is to be borrowed at 12 percent per year

Annual value
Annual value of Truck X is given as $20,000 and Annual value of Truck Y can be
calculated using following formula:
i 1 i n

Annual value 50, 000

6000
1 i n 1

(1)

Substitute the respective values in Equation (1), this is done below:

0.12 1 0.12 6
Annual value 50, 000
6, 000
1 0.12 6 1

0.12 1.12 6
50, 000
6, 000
1.12 6 1

0.12 1.9738
50, 000

6, 000
1.9738

0.236856
50, 000
6, 000
0.9738
50, 000 0.2432 6, 000
12,160 6,000
=18,160
Hence, annual value of Truck Y is calculated as 18,160.
Conventional B/C ratio
Conventional Benefit cost ratio can be calculated using following formula:
Annual value of Truck X
Annual value of Truck Y
20,000

18,160
1.10

B/C

Conventional B/C ratio is calculated as 1.10.Hence, option d is correct.