Question

1. In order for a lower-cost alternative to be attractive, the incremental benefit-cost ratio must be__________________. A. Less than the MARR B. Greater than or equal to the MARR C. Less than 1 D. Greater than or equal to 1

Answer 1

Answer:

The total discounted benefits are divided by the total discounted costs. Projects with a benefit-cost ratio greater than 1 have greater benefits than costs; hence they have positive net benefits. The higher the ratio, the greater the benefits relative to the costs. Note that simple benefit-cost ratio is insensitive to the magnitude of net benefits and therefore may favor projects with small costs and benefits over those with higher net benefits. (This problem can be eliminated by the use of the incremental benefit-cost ratio or the net present value.)