Question

A company is considering constructing a plant to manufacture a proposed new product. The land costs $300,000, the building costs $600,000, the equipment costs $250,000, and $100,000 additional working capital is required. It is expected that the product will result in sales of $750,000 per year for 10 years,

Answer 1

Modified B-C ratio = (PW of annual benefits - PW of annual expenses) / (Land + Building + Equipment + Working capital - PW of salvage value)

$= [(750,000 - 475,000) x P/A(15 = (275,000 x 5.0188**) / [1,250,000 - (800,000 x 0.2472**)]\\ = 1,380,170 / (1,250,000 - 197,760)\\ = 1,380,170 / 1,052,240\\ = 1.31\\$

Since Modified B-C Ratio is greater than 1, Project is acceptable