What are the conventional and modified Benefit to Cost ratios and how these are used in capital investment decisions
Q.3. What are the conventional and modified Benefit to Cost ratios and how these are used in capital investment decisions. Check in your workplace where equipment can be replaced by alternative brand with different price to buy and/ or different salvage value/ resale value/ disposal cost at the end of life, might have different cost to operate due to different energy rating, power consumption, spare parts etc. and different capacity/ production rate and/ or quality resulting different price of products from alternative options.
Alternatively consider that two alternative machines will produce the same product, but one will produce higher quality items which can be expected to return greater revenue.
Given the following data, determine which machine is better. Use the B/C method, a study period of 10 years, and a MARR of 10%.
Determine the B/C values for each machine by using both the conventional and the modified formulations.
Use excel and attach file as embedded file in word document/ upload file in Moodle for your analysis.
Hint
Management The conventional benefit-cost ratio has net benefits to the users in the numerator and cost to the sponsor in the denominator. The modified benefit-cost ratio takes the project operating and maintenance costs paid by the sponsor, and subtracts these from the net benefits to the users. This quantity is all in the numerator. These leaves only the projects initial costs in the denomin...
Management The conventional benefit-cost ratio has net benefits to the users in the numerator and cost to the sponsor in the denominator. The modified benefit-cost ratio takes the project operating and maintenance costs paid by the sponsor, and subtracts these from the net benefits to the users. This quantity is all in the numerator. These leaves only the projects initial costs in the denominator. The conventional and modified versions of the B-C ratio use different algebra or math to calculate the ration, but the resulting recommendation will always be the same. That is, both ratios will either be greater than or less than 1.0 at the same time, for any problem.
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