The Department of Defense is considering three sites in the National Wildlife Preserve for extraction of rare metals. The cash flows associated with each site are summarized. The extraction period is limited to 5 years and the interest rate is 10% per year. Use the B/C method to determine which site, if any, is acceptable. The monetary unit is $ million.
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Calculate total costs and rank sites; benefits are direct
Cost A = 50(A/P,10%,5) + 3
= 50(0.26380) + 3
= 16.190
Cost B = 90(A/P,10%,5) + 4
= 90(0.26380) + 4
= 27.742
Cost C = 200(A/P,10%,5) + 6
= 200(0.26380) + 6
= 58.760
Ranking: DN, A, B, C
Determine B/C for all sites initially
Site A: B/C = (B-D)/C
= (20 – 0.5)/16.190
= 1.20 Acceptable
Site B: B/C = (29 – 2.0)/27.742
= 0.97 Not acceptable
Site C: B/C = (61 – 2.1)/58.760
= 1.00 Acceptable
Compare A vs. DN; then C vs. A or DN; B was eliminated
A vs. DN: B/C = 1.20 eliminate DN
C vs. A: ?B = 61 – 20 = 41
?D = 2.1 - 0.5 = 1.6
?C = 58.76 – 16.19 = 42.57
?B/C = (41 – 1.6)/42.57
= 0.93 eliminate C
Select site A
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