BENEFIT-COST RATIO

1. A businessman invest in a medium scale business which cost him P100,000.00. The net
annual return is estimated at P30,000 for each of the next 10 years. Compute the benefit ratio
if the annual rate of interest is 20%.

P= P125,774.16

= 1.26
2. Compute the benefit cost ratio of the following project:
Project Cost = P120,000
Gross Income = P35,000/year
Operating Cost = P8,000/year
Salvage Value = 0
Life of Project = 10 years
Rate of Interest = 15%

A= 35000 – 8000 = 27000

P= P135,506.75

Present worth of cost =P 120,000

= 1.13
3 A project cost P150,000. The benefits at the end of each year for a period of 8 years is
equal to P55,000. Assuming money is worth 9% with no salvage value, compute the benefit
ratio.

P= P304,415.05

= 2.03
4 Compute the benefit ratio of the following project:
Project Cost = P95,000.00
Gross Income = P40,000/year
Operating Cost = P7,000/year

If the life of the project is 10 years and if the money is worth 10%, determine the benefit-cost
ratio of the project.

A= 40000 – 7000 = 33000

P= P202,770.71

Present worth of cost =P 95,000

= 2.13
5 Two alternatives are being considered for a project in Pampanga. The following are the
data:
A B
Initial Cost P25,000 P35,000
Uniform Annual P2,500 P4,000
Benefit
Useful Life 8 years 8 years

If the money is worth 15% annually, compute the benefit-cost ratio of the difference between
the alternatives.

Increment Cost = 35,000 – 25,000 = 10,000

Increment Benefit = 4,000 – 2,500 = 1,500

P= P6,730.98

= 0.67
6 Widget Corporation’s top account executive has an idea for a new gadget that will
revolutionize the Widget industry. The total cost to plan, develop and produce the widget is
P55,000. Once the production line has been set up, the revolutionary widget sells like hotcakes
and produces record net profits for Widget Corp. of P500,000 for the year. Figure out the
benefit cost ratio.

= 9.09

The final outcome of P9.09 is the peso representation of a P9.09 return for every P1.00
invested in the revolutionary widget. After one year of sales, the revolutionary widget paid for
itself almost ten times.
7. A federal company is considering buying an equipment to add to their facilities. The cost of
the project will be 5.5 million, with net annual return cost of P900,000. The project is expected
to be working for 20 years. At an interest rate of 6% per year, the Benefit-Cost ratio is:

P= P10,322,929.10

= 1.88
8. A small flood control dam can be constructed for a cost of P3 million. The annual
maintenance cost is expected to be P10,000 per year and damage due to flooding will be
reduced from P300,000 per year to P100,000 per year. If the dam is expected to be
permanent, the benefit-to-cost ratio at an interest rate of 6% per year is closest to:

Using capitalized cost basis:

Present Worth of Benefits = 300,000 - 100,000 = 200,000
Present Worth of Cost = 10,000 + 3,000,000(.06) = 190,000

= 1.05
9. The first cost of a permanent road that will improve access to a rural area is P1,000,000.
The annual maintenance cost is expected to be P20,000 per year. Improved accessibility will
result in benefits of P70,000 per year. At an interest rate of 6% per year, the conventional B/C
ratio is nearest to:

Using capitalized cost basis:

Present Worth of Benefits = 70,000
Present Worth of Cost = 1,000,000(0.06) + 20,000 = 80,000

= 0.88
10. The following cash flows are associated with a certain government project:

Project Cost = P1,500,000

Gross Income = P500,000/year
Operating Cost = P200,000/year
Life of Project = 10 years
Rate of Interest = 15%

Solution:

A = 500,000 - 200,000 = 300,000

P= P1,505,630.59

= 1.00