Answer:
The incremental benefit cost ratio is less than 1 therefore we must select site 1.
Explanation:
The incremental BCR can be determined using the following formula
[tex]\Delta BC_R = \frac{AW_B-AW_D-AW_M}{AW_i}[/tex]
[tex]AW_C=1,000,000(A/P,[/tex] 8% , 10)
⇒ [tex]AW_C= 1,000,000 \times \frac{0.08}{1-1.08^-^1^0}[/tex]
⇒ [tex]AW_2=2,000,000(A/P,[/tex] 8%, 20)
⇒ [tex]AW_2= 2,000,000 \times \frac{0.08}{1-1.08^-^2^0}[/tex]
⇒[tex]AW_C_2[/tex] = $203,704.42
Incremental initial investment = 203,704.42 - 149,029.49
= $ 54,674.93
Incremental benefits = 580,000 - 520,000 = 60,000
Incremental O&M = 75,000 - 80,000 = - $ 5000
Incremental Disbenefits = 140,000 - 90,000 =$ 50,000
[tex]\Delta BC_R = \frac{60,000-50,000-(-5000)}{54,674.93} \\\\\Delta BC_R=0.2743[/tex]
All solving using the present worth method also incremental benefit cost ratio comes out to be 0.2743.
The incremental benefit cost ratio is less than 1 therefore we must select site 1.
