A public works project is proposed that has total present-worth benefits of ₹ 75 million and total present-worth cost of ₹ 55 million. In deliberating this proposal, some members of the Municipal Board have suggested that the project has a total present-worth disbenefits of ₹ 15 million; other members feel that ₹ 15 million should be treated as a cost. What will be the benefit cost ratio and net benefits value while considering the disbenefits as a cost?
1.07 and ₹ 5 million
Option 4 — 1.07 and ₹ 5 million is correct.
In benefit-cost analysis, a disbenefit is a negative outcome to the public. It can be handled two ways: subtracted from benefits in the numerator, or added to costs in the denominator. The question specifically asks us to treat the ₹ 15 million disbenefit as a cost, so it goes into the denominator.
Adjusted cost = original cost + disbenefit = ₹ 55 + ₹ 15 = ₹ 70 million.
Benefit-cost ratio = benefits ÷ adjusted cost = 75 ÷ 70 = 1.07.
Net benefits = benefits − adjusted cost = 75 − 70 = ₹ 5 million.
Because the ratio exceeds 1 and net benefits are positive, the project is still economically justified, though only marginally.
Why the other options are wrong: Treating the disbenefit as a deduction from benefits (60 ÷ 55 = 1.09, net 5) or ignoring it (75 ÷ 55 = 1.36) gives different figures; options 1, 2 and 3 do not follow the 'disbenefit as a cost' instruction.
Takeaway: Placing the ₹ 15 million disbenefit in the denominator gives B/C = 75/70 = 1.07 and net benefit ₹ 5 million.
Similar Questions
Select the correct statement/s from the following :
Statement I : The slope of the NPV profile reflects how sensitive the project is to discount rate changes.
Statement II : To find total NPV of more than one projects, their NPV cannot be added.
Statement III : The certainty equivalent coefficient applies adjustments to both, the cash flows (in the numerator) and the discount factor (in the denominator).
Statement IV : The risk - adjusted discount factor applies adjustment for risk only to the discount factor (denominator).
Codes :
Indicate the correct code for the combination from the following regarding the superiority of the wealth maximisation over the profit maximisation objective of the financial management :
(a) It takes into account long term stability and survival of the firm.
(b) It takes care of all other objectives of the firm like exploring and expanding markets, etc.
(c) It is based on the assumption of perfect competition in the market.
(d) It considers risk alongwith returns.
Code :
Capital budgeting is concerned with :
Which combination of the following statements about the net present value method of the investment project appraisal is correct ?
(a) It considers all the cash flows from the project
(b) It gives more weightage to distant flows than near-term flows
(c) It considers the time value of money
Code :
In which of the following appraisal criteria of capital budgeting, the use of varying opportunity cost of capital as a discount factor is possible ?
(a) NPV
(b) IRR
(c) Pay-back Period
(d) ARR
Select the correct statement/s from the following:
Statement I: The slope of the NPV profile reflects how sensitive the project is to discount rate changes.
Statement II: To find total NPV of more than one projects, their NPV cannot be added.
Statement III: The certainty equivalent coefficient applies adjustments to both, the cash flows (in the numerator) and the discount factor (in the denominator).
Statement IV: The risk-adjusted discount factor applies adjustment for risk only to the discount factor (denominator).
Codes:
Statement – I : In general, the NPV and IRR methods lead to the same acceptance or rejection decision when a single project is involved.
Statement – II : The inconsistency in ranking of competing projects as per the NPV and IRR methods lies in the implicit assumptions with regard to different rates of returns on re-investment of intermediate cash flows.
Code :
Under the Modified Accelerated Cost Recovery System (MACRS) an asset in the “5 year property class” would typically be depreciated over how many years ?
In case the firm makes varying investments on the different investment projects, the appropriate project evaluation technique would be, which one of the following?
A company issues 11% debentures of ₹ 100 each for an amount aggregating ₹ 2,00,000 at 10% premium, redeemable at par after 5 years. The company tax rate is 40%. The cost of debt is:
Important Questions from Capital Budgeting
- Assume B is social benefits, C is social costs, r is the social discount rate, t is the time and T is the life of the investment project. The Net Present Value (NPV) of a project is
- In certainty-equivalent approach, risk adjusted cash flows are discounted at
- Statement - I : In payback period method, the risk of the project is adjusted by lessening the target payback period.
Statement - II : Sensitivity Analysis helps in calculation of net present value of the proposal.
Code : - Which one of the following equates the present value of cash out flows and the present value of expected cash inflows from a project ?
Select the correct statement/s from the following :
Statement I : The slope of the NPV profile reflects how sensitive the project is to discount rate changes.
Statement II : To find total NPV of more than one projects, their NPV cannot be added.
Statement III : The certainty equivalent coefficient applies adjustments to both, the cash flows (in the numerator) and the discount factor (in the denominator).
Statement IV : The risk - adjusted discount factor applies adjustment for risk only to the discount factor (denominator).
Codes :
