Three Independent Projects Are Available for a Secret Government Agency

question 10

Essay

Three independent projects are available for a secret government agency. The estimated costs associated with each alternative are given below. Use the conventional B- C ratio method to determine which alternative(s), if any, should be selected at an interest rate of 7% per year. Assume a project life of 20 years and a B- C ratio of at least 1 for evaluation. $$\begin{array} { | l | l | l | l | } \hline & \text { Project } A & \text { Project } B & \text { Project } C \\\hline \text { itial cost, } \$ & \$ 1,300,000 & \$ 1,200,000 & \$ 1,450,000 \\\hline \text { nnual benefits, } \$ / y e a r & \$ 490,000 & \$ 450,000 & \$ 535,000 \\\hline \text { nnual disbenefits, } \$ / y e a r & \$ 310,000 & \$ 280,000 & \$ 345,000 \\\hline\end{array}$$

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Definitions:

Perfect Substitutes

Perfect substitutes are two goods that can be used in place of each other with no loss of utility or preference by consumers.

Income Effect

Refers to the change in an individual's or economy's purchase of goods and services resulting from changes in income levels.

Substitution Effect

The change in consumption patterns due to a change in relative prices, holding the consumer's level of utility constant.

Price

The fiscal amount needed for the acquisition of a product or service.