Two relatively inexpensive alternatives are available for reducing potential earthquake damage at a top secret government research site. The cash flow estimates for each alternative are given below. At an interest rate of 8% per year, use the B/C ratio method to determine which one should be selected. Use a 20-year study period, and assume the damage costs would occur in the middle of the study period, that is, in year 10.
 FIGURE 1.png)
PW1 of costs = 600,000 + 50,000(P/A,8%,20)
= 600,000 + 50,000(9.8181)
= $1,090,905
PW2 of costs = 1,100,000 + 70,000(P/A,8%,20)
= 1,100,000 + 70,000(9.8181)
= $1,787,267
Alternative 2 has the larger total cost
?C = PW2 – PW1 = 1,787,267 - 1,090,905
= $696,362
PW of incremental benefits for alternative 2:
?B = 950,000 – 250,000
= $700,000
?B/C = 700,000/696,362
= 1.01
Select alternative 2
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