Consider three investment projects, A1,A2, and A3. Each project has the same sev
ID: 1250975 • Letter: C
Question
Consider three investment projects, A1,A2, and A3. Each project has the same sevie life, and the present worth of each component value, Benefits (B), Initial Cost (I), and Recurring Annual Cost (C’), computed at 10% is as follows:
A1 A2 A3
I 5000 20000 14000
B 12000 35000 21000
C'x 4000 8000 1000
a) If all three projects are independent, which projects would be selected based on the B/C ratio?
b) If the projects are mutually exclusive, which project would be the best?
Explanation / Answer
a) B/C for A1 = 12000/(5000+4000) = 1.33 B/C for A2 = 35000/(20000+8000) = 1.25 B/C for A3 = 21000/(14000+1000) = 1.40 B/C is highest for A3. Hence this will be selected. (ANSWER) b) NPV = NB for A1 = 12000-(5000+4000) = 3000 i.e. 3000/5000 = 0.6 per unit of investment. NPV = NB for A2 = 35000-(20000+8000) = 7000 i.e. 7000/20000 = 0.35 per unit of investment. NPV = NB for A3 = 21000-(14000+1000) = 6000 i.e. 6000/14000 = 0.43 per unit of investment. Hence, A1 gives better net benefits (NBs) per unit of investment and so this shall be selected. (ANSWER)