Question

A state agency is considering two mutually exclusive alternatives for upgrading the skills of its technical staff.

Alternative 1 involves purchasing software that will reduce the time required to collect background information on each client. The total cost for the purchase, installation, and training associated with the new software is $840,900. The present worth of the benefits from increased efficiency is expected to be $1,020,000
Alternative 2 involves multimedia training to improve the performance of the staff technicians. The total cost to develop, install, and train the technicians will be $1,780,000. The present worth of the benefits from increased performance due to training is expected to be $1,990,000. Use a B/C analysis to determine which alternative, if any, the agency should undertake.

Answer 1

Alternative 1 with B/C ratio of 1.21

Step-by-step explanation:

Benefit to cost analysis can be computed as follows to determine which project is worthwhile.

Alternative 1

B/C ratio = 1,020,000 / 840,900 = 1.21

Alternative 2

B/C ratio = 1,990,000 / 1,780,000 = 1.12

Both of the projects yield a positive ratio which is grater than 1, however the B/C ratio of alternative 1 is healthier and given the fact that it requires less initial outlay; this might be a good choice for the agency to adopt. The final decision would be taken by considering more than just these factors.

Hope that helps.