The town of Podunk is considering building a new downtown parking lot. The land will cost $25,000 and the construction cost of the lot is estimated to be $150,000. Each year costs associated with the lot are estimated to be $17,500. The income from the lot is estimated to be $18,000 the first year and increase by $3,500 each year for the twelve year expected life of the lot. Determine the B/C ratio if Podunk uses a cost of money of 4%.

The B/C ratio if Podunk uses a cost of money of 4% is 0.99

Explanation:

In order to calculate the B/C ratio if Podunk uses a cost of money of 4%, we would have to use the following formula:

B/C ratio = PW BENEFITS / PWCOSTS

PW BENEFITS = $18,000 (P/A, 4%,12) + $3,500(P/G, 4%, 12) = $334,298

PW COSTS = $175,000 + $17,500(P/A. 4%,12) = $339,238

Therefore, B/C ratio = $334,298 / $339,238

B/C ratio = 0.99

The B/C ratio if Podunk uses a cost of money of 4% is going to be $ 0.99

Explanation:

Base on the scenario been described in the question, we can be able to use the following formula in calculation of the B/C ratio if Podunk uses a cost of money.

B/C ratio = Benefits of PW/ Costs of PW

Substituting the values we have ;

Benefits of PW = $18,000 (P/A, 4%,12) + $3,500(P/G, 4%, 12)

Benefits of PW = $334,298

Costs of PW = $175,000 + $17,500(P/A. 4%,12)

Costs of PW = $339,238

B/C ratio = Benefits of PW/ Costs of PW

B/C ratio = $334,298 / $339,238

B/C ratio = $0.99

business modeling is correct