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Timeperiod 1 2 3 4 Amount $1,000.00 $2,000.00 $3,000.00 $4,000.00 Present value of 4 years of irregular revenues = $7,962.22 Step 3 - Calculation of the B/C ratio Size Alternative 0 Table4-13. ProjedSizeAlternatives Total Benefits Totaf Cost ($PV) ($PV) NPV $0 $0 $0 PV of benefits PV of costs B/C ratio $7,962.22 $7,73 1.29 1.029869 The B/C ratio of the investment alternative in this example is 1.03. The higher the ratio, the greater the average dolls benefit per dollar of cost. Like analyses using IRR, B/Cratio analyses may provide results inconsistent with those of NPV analyses. As with IRR, B/C ratio analysis is acceptable for acceptlreject decisions of single projects. However, if the B/C ratio is calculated using incremental benefits and costs, it can be used to design and size projects. For example, consider the project size alternatives in Table 4-13. A 10,000 15,000 B 12,000 18,000 C 14,000 19,000 5,000 6,000 5,000 To apply the B/C test for comparing the alternatives in this example, the alternatives would be arranged inorderofincreasingcosts,asdisplayedinTable4-13. Next,theB/Cratioforincrementalbenefitsand costs is calculated. The incremental costs of Alternative A over the costs of doing nothing is $10,000, and the incremental benefits are $15,000. Thus the incremental B/C ratio is 1.5. Alternative A is now the baseline, and the incremental B/C ratio of Alternative B over Alternative A is calculated as 1.5(3,000/2,000). BecausetheincrementalB/CratioofAlternativeBisgreaterthan1,itnowbecomes the new baseline. The incremental B/C ratio of Alternative C to the new baseline is calculated as 0.5(1,000/2,000). AlternativeCdoesnotbecomethenewbaselinebecausetheincrementalB/Cratio is less than 1. In this example, the most cost-effective project size is Alternative B, based on the incrementalB/C. TheNPVvaluesaredisplayedinTable4-13simplytoshowthatAlternativeBisin fact the most profitable project (Ruegg and Marshall 1990). 60PDF Image | A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies
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