Cost-Benefit Analysis Listed on the next page are some probability estimates of the costs and benefits associated with two competing projects.

a. Compute the net present value of each alternative. Round the cost projections to the nearest month. Explain what happens to the answer if the probabilities of the recurring costs are incorrect and a more accurate estimate is as follows:
A B .10 $ 75,000 .4 $ 85,000 .55 95,000 .4 100,000 .35 105,000 .2 110,000

b. Repeat step

(a) for the payback method.

c. Which method do you feel provides the best source of information? Why?

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COST OF CAPITAL = .14 Problem 7: Cost-Benefit Analysis A B Probability Amount Probability Amount Project completion time 0.5 12 months 0.6 12 months 0.3 18 months 0.2 18 months 0.2 24 months 0.1 24 months Expected useful life 0.6 4 years 0.5 4 years 0.25 5 years 0.3 5 years 0.15 6 years 0.2 6 years One-time costs 0.35 $200,000 0.2 $210,000 0.4 250,000 0.55 250,000 0.25 300,000 0.25 260,000 Recurring costs 0.1 $ 75,000 0.4 $ 85,000 0.55 95,000 0.4 100,000 0.35 105,000 0.2 110,000 Annual tangible benefits starting with weighted average completion date 0.3 $220,000 0.25 $215,000 0.5 233,000 0.5 225,000 0.2 240,000 0.25 235,000