A city is trying to decide which of two traffic devices to install. Device A costs $1000 and has useful life of five years. Device A can be expected to result in $300 savings annually. Device B costs $2000 and has useful life of eight years. Device B can be expected to result in $400 savings annually.Both devices have no salvage value at the end of their lives.With interest at 7%, the benefit cost ratio of the most cost effective device is most nearly:
Solution:
Device A:
PW of cost = $1000
PW of benefits = $300 (P/A, 7%, 5) = $1230
B/C = 1230/1000 = 1.23
Device B:
PW of cost = $2000
PW of benefits = $400 (P/A, 7%, 8) = $2388
B/C = 2388/2000 = 1.19
In order to maximize the benefit-cost ratio, select Device A; 1.23