Question

A state department of health is considering a public awareness campaign to encourage vaccination. It determines that the cost of this campaign would be $760,000 per year for the next 6 years. It estimates that the campaign would reduce rates of illness and communicable disease. At the end of the first year of the campaign, the resulting savings would be $1,000,000; the savings would decrease by $80,000 each of the following 5 years. Assuming a discounting factor of 5%, compute the benefit cost ratio.

Answer 1

1.068

Step-by-step explanation:

The benefit cost ratio is used to determine the profitability of an investor. It is determined by dividing the present value of benefit by the present value of cost

Benefit cost ratio (BC) = present value of benefits / present value of costs

if BC is greater than 1, the project is profitable

If BC is less than 1, the project is not profitable

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Present value of the costs

Cash flow each year from year 1 to 6 = $760,000

I = 5

PV = 3,857,525.97

Present value of benefits

Cash flow in year 1 = $1,000,000

Cash flow in year 2 = $1,000,000 - $80,000 = $920,000

Cash flow in year 3 = $920,000 - $80,000 = 840,000

Cash flow in year 4 = 840,000 - $80,000 = 760,000

Cash flow in year 5 = 760,000 - $80,000 = $680,000

Cash flow in year 6 = $680,000 - $80,000 = $600,000

I = 5%

PV BENEFIT = 4,118,252.57

BC ratio = 4,118,252.57 / 3,857,525.97 = 1.068

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute