Skip to main content

Modified B/C ratio for 100,000 project

Short answer

Modified B/C = (PW of benefits – PW of O&M) / (I – PW of salvage) = 135,180 / 96,145 = 1.41. Since >1, the project is acceptable.

Evaluate the modified B/C ratio for the following project: initial investment = Rs 100,000, salvage value = Rs 10,000, annual benefits = Rs 25,000, annual expenses = Rs 3,000, useful life = 10 years, MARR = 10%. (The paper refers to the data of Q4(b).)

The modified B/C ratio treats operating and maintenance cost as a deduction from benefits (net benefit) and keeps only the investment (less salvage) in the denominator:

Modified B/C = [PW(B) − PW(O&M)] / [I − PW(S)]

 yr 0: -1,00,000     yr 1..10: +25,000 benefit, -3,000 O&M     yr 10: +10,000

Factors at 10%, 10 years: (P/A) = 6.1446, (P/F) = 0.3855

  • PW(B) = 25,000 × 6.1446 = Rs 153,614
  • PW(O&M) = 3,000 × 6.1446 = Rs 18,434
  • PW(S) = 10,000 × 0.3855 = Rs 3,855

Modified B/C = (153,614 − 18,434) / (1,00,000 − 3,855) = 135,180 / 96,145 = 1.406

For comparison, the conventional ratio is 153,614 / (1,00,000 + 18,434 − 3,855) = 1.341. Both are above 1.

Answer: modified B/C = 1.41 > 1, so the project is acceptable.

✓ Answer checked by Claude Opus 5.5 (high effort)

Related questions

All Engineering Economics chapter 3 questions →