A small town is considering paving paradise hotel to put up a parking lot. The land will cost $25,000 and the construction of the lot is estimated to be $150,000. Each year, costs associated with the parking lot are estimated to be $17,500. The income from the lot is expected to be $18,000 the first year and increase by $3,500 each year for the 12 year life of the lot. Determine the B/C ratio if interest rate is 12%. [4 points]

0.71

Explanation:

The benefit cost ratio is used to determine the profitability of an investor. It is determined by dividing the present value of benefit by the present value of cost

Benefit cost ratio (BC) = present value of benefits / present value of costs

if BC is greater than 1, the project is profitable

If BC is less than 1, the project is not profitable

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Present value of the benefits

Cash flow in year 1 =  $18,000

Cash flow in year 2 =  $18,000 + 3500 = $21500

Cash flow in year 3 = $18,000 + (3500 x 2) = $25,000

Cash flow in year 4 = $18,000 + (3500 x 3) = $28500

Cash flow in year 5 = $18,000 + (3500 x 4) = $32,000

Cash flow in year 6 = $18,000 + (3500 x 5) = $35,500

Cash flow in year 7 = $18,000 + (3500 x 6) = $39,000

Cash flow in year 8 = $18,000 + (3500 x 7) = $42,500

Cash flow in year 9 = $18,000 + (3500 x 8) = $46,000

Cash flow in year 10 = $18,000 + (3500 x 9) = $49500

Cash flow in year 11 = $18,000 + (3500 x 10) = $53,000

Cash flow in year 12 = $18,000 + (3500 x 11) = $56,500

I = 12 %

PV = $202,331.70

Present value of the cost

Cash flow in year 0 = $25,000 + $150,000 = $175,000

Cash flow in year 1 to 12  = $17,500.  

I = 12 %

PV = $283,401.55

B/C ratio =  $202,331.70 /  $283,401.55 = 0.71

 To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

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