Cost (benefit/cost) question

Submitted by abourneuf on Tue, 04/23/2013 - 19:30

A project will realize a benefit of $1 million in 2 years, with a prevailing interest rate of 10 percent. We must invest $0.41 million today to perform the work. The benefit/cost ratio is roughly...


a. 2:1


b. 4:1


c. 3.5:1


d. 1.5:1


 


According the moke test I used, the right answer is A. I used the PV=FV/(1+R)^N formula and the BCR=(B-C)/C formula, but no result match with the right answer. I would much appreciate that someone explain me how to get 2:1


Thanks!

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crushPMP's picture

crushPMP

Tue, 04/23/2013 - 19:35

Benefit = PV = 1000000/(1.10)^2 = 826446.280991735
Cost = 410000 (Given)


BCR = B/C = 826446.280991735/410000 = 2.0157:1

Ans = A

crushPMP's picture

crushPMP

Tue, 04/23/2013 - 19:38

Benefit figure was already given, you did not have to subtract it from the cost as you did in your numberator. Had it been Revenue then you method of subtracting the Cost would has worked.


All you had to do is bring the benefit number to Present Value using Time Value of Money (TVM) calculation and that becomes the Present benefit (numerator), divide that by the present cost, which gets you to present BCR.

abourneuf

Tue, 04/23/2013 - 20:38

Thank you very much! It's frustating to realize that I was very close to the right answer, stuck because of a wrong BCR formula from my braindump sheet...

crushPMP's picture

crushPMP

Tue, 04/23/2013 - 20:54

Happens to the best of us...