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9 May, 19:53

A library shelving system has a fi rst cost of $20,000 and a useful life of 10 years. The annual maintenance is expected to be $2,500. The annual benefi ts to the library staff are expected to be $9,000. If the effective annual interest rate is 10 percent, what is the benefi t-cost ratio of the shelving system?

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  1. 9 May, 20:15
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    The benefit cost ratio is 1.564

    Explanation:

    The benefit-cost ratio is the ratio of the present value of benefits to the present value of costs. It is thus calculated as follows.

    Benefit-cost ratio = Present value of benefits / Present value of costs

    Present value of costs = $20,000 + $2,500 (P/A, 10%, 10 years)

    = $20,000 + $15,361

    = $35,361

    Present value of benefits = $9,000 (P/A, 10%, 10 years)

    = $9,000 x 6.145

    = $55,305

    Benefit-cost ratio = $55,305 / $35,361

    = 1.564
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