Question

In a highway construction the drivers save annually around $20,000 and the road cost construction was $100,000 and the annual maintenance is $10,000. The interest rate is 5% and this alternative is evaluated in a 20 year time span. The B/C ratio is nearly:

a. 2.49
b. 1.25
c. 1.11
d. 0.24

Answer 1

b. 1.25

Step-by-step explanation:
The B/C ratio is calculated by dividing the present value of the benefits (PV of benefits) by the present value of the costs (PV of costs). The PV of benefits is calculated by taking the annual savings of $20,000 and multiplying it by the present value factor (1/(1+r)^n) where r is the interest rate (5%) and n is the number of years (20). The PV of costs is calculated by taking the road cost of $100,000 and adding the annual maintenance of $10,000 for each year for 20 years and then multiplying it by the present value factor. The B/C ratio is then calculated by dividing the PV of benefits by the PV of costs. In this case, the B/C ratio is 1.25.