Question 10.8: B−C Analysis with Unequal Project Lives Two mutually exclusi...
B−C Analysis with Unequal Project Lives
Two mutually exclusive alternative public-works projects are under consideration. Their respective costs and benefits are included in the table that follows. Project I has an anticipated life of 35 years, and the useful life of Project II has been estimated to be 25 years. If the MARR is 9% per year, which, if either, of these projects should be selected? The effect of inflation is negligible.
| Project I | Project II | |
| Capital investment | $750,000 | $625,000 |
| Annual operating and maintenance costs | 120,000 | 110,000 |
| Annual benefit | 245,000 | 230,000 |
| Useful life of project (years | 35 | 25 |
AW(Costs, I) = $750,000(A/P, 9%, 35) + $120,000 = $190,977,
AW(Costs, II) = $625,000(A/P, 9%, 25) + $110,000 = $173,629,
B–C(II) = $230,000/$173,629 = 1.3247 > 1.0.
Therefore, Project II is acceptable.
\Delta B/\Delta C of (I–II) = ($245,000 − $230,000)/($190,977 − $173,629)
= 0.8647 < 1.0.
Therefore, increment required for Project I is not acceptable.
Decision: Project II should be selected