What is the Modified B/C ratio for the following cash flow estimates at interest rate of 6% per year? Assume the project is justified over 10 years. Initial Cost $20 (end of) first year, decreasing by $5 per year for 3 additional years Annual Cost $2 per pear Benefits $9 per year Disbenefits $0.6 per year Group of answer choices Between 1.00-1.20 Between 1.20-1.40 Between 1.4-1.6 None of above

Between 1.00 to 1.20

Explanation:

Annual Cost = 2 per year

Benefits = 9 per year

Dis benefits = 0.6 per year

Life = 10 years

Interest Rate = 6%

Calculate the conventional benefit cost ratio.

Conventional Benefit Cost Ratio Using Present Worth Method.

B/C Ratio = PW of Benefits - PW of Dis benefits : PW of initial cost + PW of annual cost

PW of Benefits = 9 (P/A, 6%, 10)

PW of Benefits = 9 (7.3601) = 66.24

PW of Dis benefits = 0.6 (P/A, 6%, 10)

PW of Dis benefits = 0.6 (7.3601) = 4.42

PW of initial cost = 20 (P/A, 6%, 4) - 5 (P/G, 6%, 5)

PW of initial cost = 20 (3.4651) - 5 (4.9455) = 44.57

PW of annual Cost = 2 (P/A, 6%, 10)

PW of annual Cost = 2 (7.3601) = 14.72

Calculate Conventional Benefit Cost Ratio

B/C Ratio = (66.24 - 4.42) : (44.57 + 14.72)

B/C Ratio = 61.82 : 59.29

B/C Ratio = 1.04

Answer - Between 1.00 to 1.20