In the development of a publicly owned, commercial waterfront area, three possib
ID: 2614142 • Letter: I
Question
In the development of a publicly owned, commercial waterfront area, three possible independent plans are being considered. Their costs and estimated benefits are given in the table to the right. a. Which plan(s) should be adopted, if any, if the controlling board wishes to invest any amount required, provided that the B-C ratio on the required investment is at least 1.02 b. Suppose that 10% of the costs of each plan are reclassified as disbenefits, what percentage change in the BC ratio of each plan results from the reclassification? c. Comment on why the rank-orderings in (a) are unaffected by the change in (b) PW ($000s) Plan Benefits A $132,000 $121,000 01000 160,000 Costs 123,000 143,000Explanation / Answer
Conventional benefit-cost ratio (B/C ratio) of the project is computed as follows Costs Benefits B/C A 132000 121000 0.9167 B 101000 160000 1.5842 C 123000 143000 1.1626 if the controlling board wishes to invest any amount required, provided BC ratio is atleast 1, Plans B & C should be adopted. 2 If 10 % of the costs of each plan is treated as disbenefits BC ratio = : =( PW of Benefits - PW of disbenefits )/ PW of cost PW cost PW disbenefits PW Benefits - PW disbenefits B/C % change A 132000 13200 107800 0.8167 -10.91 B 101000 10100 110900 1.0980 -30.69 C 123000 12300 108700 0.8837 -23.99 There is no change in rankings because of disbenefits as the initial cost of investment is not changing and there is not much difference between the initial costs