A city council is planning to build a new bridge across a creek. This will require an immediate expenditure of $50 000, but will save citizens an estimated $5 000 in travel costs every year over the next twenty years. Alternatively, they could renovate an existing bridge. This would only cost $20 000, but the saving in travel costs would only be $2 000 every year. If the council's MARR is 5%, what is the BCR for upgrading from the renovated bridge to the new bridge?
A)0.75
B)1.20
C)1.25
D)1.64
E)2.00

Question

Quizplus · Accepted Answer

The Benefit-Cost Ratio (BCR) is calculated by dividing the present value of benefits by the present value of costs. For the new bridge, the present value of benefits is $5,000 per year for 20 years, and for the renovated bridge, it's $2,000 per year for 20 years. The difference in benefits is $3,000 per year. The present value of this difference, discounted at 5%, is calculated and compared to the additional cost of $30,000 ($50,000 - $20,000) for the new bridge. The BCR is approximately 1.25.

A City Council Is Planning to Build a New Bridge