The benefit-cost ratio for a project with an initial outlay of $9000 and net cash flows of $5000 p.a.for the next three years and a required rate of return of 10% p.a.is:
A)$3434.
B)0.3815
C)1.21
D)1.3815

Question

Quizplus · Accepted Answer

The formula to calculate the benefit-cost ratio is:

Benefit-cost ratio = (Present value of cash inflows / Initial investment)

First, we need to calculate the present value of the net cash flows:

PV of net cash flows = $5000 / (1 + 0.1)^1 + $5000 / (1 + 0.1)^2 + $5000 / (1 + 0.1)^3
PV of net cash flows = $5000 / 1.1 + $5000 / 1.21 + $5000 / 1.331
PV of net cash flows = $4533.57 + $4132.23 + $3751.21
PV of net cash flows = $12417.01

Now, we can calculate the benefit-cost ratio:

Benefit-cost ratio = $12417.01 / $9000
Benefit-cost ratio = 1.3815

Therefore, the best choice is D, with a benefit-cost ratio of 1.3815.

The Benefit-Cost Ratio for a Project with an Initial Outlay