10212-10-30FPP

AID:1825 | 16/10/2013

Given information:

Investment required is given as $60,000.

Annual maintenance costs is given as $5,000
Savings in the third year is given as $24,000
MARR is given as 12 percent per year.

Present value of benefit

Present value of benefit can be calculated using following formula:
1 i n 1
Present value Savings

i 1 i n

Maintance
Cost

1 i

1 i 1
n
i 1 i
n

(1)
Substitute the respective values in Equation (1), this is done below:
16

1 0.12 1

Present value 24,000

5, 000

0.12 1 0.12 16

16
1.12 14 1

1.12 1

1
24,000

5, 000

2
0.12 1.12 14 1.12
0.12 1.12 16

4.887 1

1
6.130 1
24,000

5,
000

0.12 4.887 1.2544

0.12 6.130

1
5.130
3.887

24,000

5, 000

0.7356
0.58644 1.2544

24,000 6.628 0.797 5, 000 6.97

1 0.12 1
1

14
2

0.12 1 0.12
1

0.12

14

126,780.384 34,869.494
91,910.89

Present value of cost

Present value of cost is given as$60,000
Modified B/C ratio
Modified Benefit cost ratio can be calculated using following formula. This is done
below:
B/C

Present value of Benefit

Present value of Cost

(2)

Substitute the respective values in Equation (2) to find the conventional B/C ratio:
91,910.89
60,000
1.53

B/C

Modified B/C ratio is calculated as 1.53.Hence, option (a) is correct.