Homework #8

Questions :
A ready-mix concrete producer is considering to install a new mixer system:

at rate of return 10% determine which system should be installed using B/C analysis?
Solutions :
Benefit/ cost ratio analysis :

From equation

Modified B/C

Conventional B/C :

- includes operation & maintenance cost

- initial investment replaces cost as denominator

B/C

B D O&M
I

Calculation can be made in present worth, future worth or annuity

With : B = Benefit ; D = Disbenefit ; C = Cost ; I = Initial Cost ; O&M = Operation &maintenance / AOC
(Annual Operating Cost)
In this case , Assume using annual worth analysis

For system A :
Cash flow diagram.
SV = $221500

First cost

(+)

Total unit price :

unit price $1286250

Unit price x annual production :

122.50$/cm x 10500cm =

$1286250

AOC = $320000
OC = $220000
$2.25M

(-)

Read from table (A/F, 10%, 3) = 0.30211

B1 = SV =$221500(A/F, 10%, 3) = $221500 x 0.30211 = $66917.37
Total unit price : Unit price x annual production : 122.50$/cm x 10500cm = $1286250
B2 = $1286250

Read from table (P/F, 10%, 2) = 0.8264 ; (A/P, 10%, 3) = 0.40211

C1 = OC (Overhaul Cost) = $220000(P/F, 10%, 2)(A/P, 10%, 3) = $220000.(0.8264).(0.40211)=$73106.81
Read from table (A/P, 10%, 3) =0.40211
C2 = Initial Investment = $2250000(A/P, 10%, 3) = $2250000.(0.40211) = $904747.5
C3 = AOC (Annual Operating Cost) = $320000
Conventional B/C analysis :
B/C =

= 1.042

Modified B/C analysis :

B/C =

= 1.061

For system B :
Cash flow diagram
SV = $308000

First cost

unit price $2597000 (+)

Total unit price :

Unit price x annual production :
122.50$/cm x 21200cm =

$2597000

AOC = $495000
OC = $245000
$2.95M

OC = $245000
(-)

Read from table (A/F, 10%, 4) = 0.21547

B1 = SV =$308000(A/F, 10%, 4) = $308000 x 0.21547 = $66364.76
Total unit price : Unit price x annual production : 122.50$/cm x 21200cm = $2597000
B2 = $2597000
Read from table (P/F, 10%, 2) = 0.8264 ; (A/P, 10%, 4) = 0.31547 ; (A/F, 10%, 4) = 0.21547
C1 = OC (Overhaul Cost) = $245000(P/F, 10%, 2)(A/P, 10%, 4)+ $245000(A/F, 10%, 4) =
$245000.(0.8264).(0.31547) + $245000.(0.21547) = $116662.7
Read from table (A/P, 10%, 4) = 0.31547
C2 = Initial Investment = $2950000(A/P, 10%, 4) = $2950000.(0.31547) = $930636.5
C3 = AOC (Annual Operating Cost) = $495000
Conventional B/C analysis :
B/C =

= 1.726

Modified B/C analysis :

B/C =

= 2.070

For system C :
Cash flow diagram
SV = $367500

First cost

unit price $2437750 (+)

Total unit price :

Unit price x annual production :
122.50$/cm x 19900cm =

$2437750

AOC = $401500
OC = $295000
$2.75M

OC = $295000
(-)

Read from table (A/F, 10%, 4) = 0.21547

B1 = SV =$367500(A/F, 10%, 4) = $367500 x 0.21547 = $79185.225
Total unit price : Unit price x annual production : 122.50$/cm x 19900cm = $2437750
B2 = $2437750
Read from table (P/F, 10%, 2) = 0.8264 ; (A/P, 10%, 4) = 0.31547 ; (A/F, 10%, 4) = 0.21547
C1 = OC (Overhaul Cost) = $295000(P/F, 10%, 2)(A/P, 10%, 4) )+ $245000(A/F, 10%, 4) =
$295000.(0.8264).(0.31547) + $295000.(0.21547) = $140471.4
Read from table (A/P, 10%, 4) = 0.31547
C2 = Initial Investment = $2750000(A/P, 10%, 4) =$2750000.(0.31547) = $867542.5
C3 = AOC (Annual Operating Cost) = $401500
Conventional B/C analysis :
B/C =

= 1.785

Modified B/C analysis :

B/C =

= 2.098

For conclusion after we compare system A, B & C, we chose system C because it has more benefit - cost
ratio.