Consider the cash flows in problem #1. If MARR=20%, the benefit/cost ratio is cl
ID: 2440441 • Letter: C
Question
Consider the cash flows in problem #1. If MARR=20%, the benefit/cost ratio is closest to..
I know the answer is c 0.83 but I don't know how to add an increasing O&M cost to my EUAC equation
1. Given the characteristics below, the simple payback period for Altermative XYZ. Inc. is elosest to. Alternative XYZ, Inc Initial Cost Benefits 13 $80,000 per year S30,000 in year l; O&M; Costs Remainingvears?ncreasebr5% more than the previous year Salvage $25,000 36S 52,01 a) 1.5 years b) 2.3 years d) 2.7 years 0 34 years 9)4.1 years h) 4.5 years i) 5.9 years j) cannot be calculated 2. Consider the cash flows in problem u 1 . If MARR-20%, the benefit/cost ratio is closest to a) 0.81 b) 0.82 30.83 d)0.85 e) 1.43 ) 1.51 ) 1.62 b) 1.7Explanation / Answer
ANSWER:
i = 20% and n = 5 years
pw of benefits = benefits(p/a,i,n)
pw of benefits = 80,000(p/a,20%,5)
pw of benefits = 80,000 * 2.991
pw of benefits = $239,280
pw of salvage value = salvage value(p/f,i,n)
pw of salvage value = 25,000(p/f,20%,5)
pw of salvage value = 25,000 * 0.4019
pw of salvage value = $10,047.5
total benefits = pw of benefits + pw of salvage value = $239,280 + $10,047.5 = $249,327.5
o and m cost in year 1 = $30,000
increase in o and m costs = 5%
o and m cost in year 2 = o and m cost in year 1 + 5% * o and m cost in year 1
o and m cost in year 2 = $30,000 + 5% * 30,000 = $30,000 + $1,500 = $31,500
o and m cost in year 3 = o and m cost in year 2 + 5% * o and m cost in year 2
o and m cost in year 3 = $31,500 + 5% * 31,500 = $31,500 + $1,575 = $33,075
o and m cost in year 4 = o and m cost in year 3 + 5% * o and m cost in year 3
o and m cost in year 4 = $33,075 + 5% * 33,075 = $33,075 + $1,653.75 = $34,728.75
o and m cost in year 5 = o and m cost in year 4 + 5% * o and m cost in year 4
o and m cost in year 5 = $34,728.75 + 5% * 34,728.75 = $34,728.75 + $1,736.4375 = $36,465.1875
pw of o and m costs = o and m costs in year 1(p/f,i,1) + o and m costs in year 2(p/f,i,2) + o and m costs in year 3(p/f,i,3) + o and m costs in year 4(p/f,i,4) + o and m costs in year 5(p/f,i,5)
pw of o and m costs = 30,000(p/f,20%,1) + 31,500(p/f,20%,2) + 33,075(p/f,20%,3) + 34,728.75(p/f,20%,4) + 36,465.1875(p/f,20%,5)
pw of o and m costs = 30,000 * 0.8333 + 31,500 * 0.6944 + 33,075 * 0.5787 + 34,728.75 * 0.4823 + 36,465.1875 * 0.4019
pw of o and m costs = $24,999 + $21,873.6 + $19,140.5025 + $16,784.4049 + $14,655.3589
pw of o and m costs = $97,452.8662
initial costs = $200,000
total costs = pw of o and m costs + initial costs = $97,452.8662 + $200,000 = $297,452.8662
b/c ratio = total benefits / total costs = $249,327.5 / $297,452.8662 = 0.8382
hence option c is the right answer.