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Homework answers / question archive / Select the better of two proposals to improve street safety and lighting in a colonia in south central New Mexico
Select the better of two proposals to improve street safety and lighting in a colonia in south central New Mexico. Use a B/C analysis and an interest rate of 8% per year. Proposal 1 Proposal 2
Initial cost, $ 900,000 1,700,000
Annual M&O cost, $/year 120,000 60,000
Annual benefits, $/year 530,000 650,000
Annual disbenefits, $/year 300,000 195,000
Life, years 25 30
The benefit cost ratio can be calculated using the following formula for modified Benefit cost ratio.
All values in the table are in per years term except Initial investment. Convert Initial investment into AW.
In case of proposal 1= 900,000(A/P,8%,25) = $ 84,310.90
In case of proposal2= 1700000(A/P,8%,30) = $ 151,006.64
Calculating the Benefit cost ratio
Now calculation the BCR of proposal 2.
The benefit cost ratio of proposal 2 is higher than the BCR of proposal 1. Hence select alternative proposal 2.
Second method: -
We can also determine the Benefit cost ratio using the Conventional method refer the formula below
Calculating the BCR using conventional method
Calculating BCR for proposal 2.
Using conventional BCR too the proposal 2 must be selected.
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