Benefit Cost Ratio (BCR)
LA Transportation is considering investing in new buses. The first cost of these new buses is $20 million. This cost will be spread equally over a 4-year period and paid at the beginning of the first year. These new buses will bring in initial revenue of $2.5 million, and revenue will increase by $0.75 million each year till the end of this project. The annual O&M cost is $7 million. This project will also cause an energy saving of $14 million yearly to the public. The economic life for these new buses is 10 years. There will not be any salvage value at the end of this project.
Assume LA Transportation is a governmental entity. The MARR is 18%.
Calculate the Conventional and the Modified BCR for this project. Should this investment be made? Why?