Abu Dhabi Tourism Authority is considering building a new Head Office building.
ID: 1117632 • Letter: A
Question
Abu Dhabi Tourism Authority is considering building a new Head Office building. Two alternatives have been identified and their details are shown below Alternatives Construction (Initial cost)10,000,000 Dhs 8,000,000 Dhs Operations & Maintenance Benefits to the Community Dis-Benefits Alternative A Alternative B 1,000,000 Dhs/year 500,000 Dhs/year 3,500,000 Dhs/year 2.000,000 Dhs/year 1,000,000 Dhs/year 500,000 Dhs/year Assume the Life Expectancy of Both buildings is 15 years and the MARR is 8% per year. Calculate the B/C ratio and select the best alternative.Explanation / Answer
B/C Ratio (Using Present worth, PW) = [PW of benefits - PW of disbenefits - PW of Annual M&O] / Initial cost
For Alternative A,
PW of benefits - PW of disbenefits - PW of Annual M&O (Dhs '000) = (3,500 - 1,000 - 1,000) x P/A(8%, 15)
= 1,500 x 8.5595 = 12,839
B/C Ratio = 12,839,000 / 10,000,000 = 1.28
For Alternative B,
PW of benefits - PW of disbenefits - PW of Annual M&O (Dhs '000) = (2,000 - 500 - 500) x P/A(8%, 15)
= 1,000 x 8.5595 = 8,559.5
B/C Ratio = 8,559,500 / 8,000,000 = 1.07
Since Alternative A has a higher B/C ratio, this should be chosen.