An investor is considering constructing an office building. Three different buil

Question

An investor is considering constructing an office building. Three different buildings are being analyzed Using benefit-cost ratio analysis and an 8% MAAR, determine which alternative, if any, should be selected. Compare the 5 stories and 2 stones buildings using the benefit cost ratio The benefit-cost ratio is 1.30. The 5 stories option is better than the 2 stories alternative. The benefit cost ratio is 1.19. The 5 stones option is better than the 2 stories alternative. The benefit-cost ratio is 0.91 The 2 stories option is better than the 5 stones alternative. The benefit-cost ratio is 0.75 The 2 stories option is better than the 5 stories alternative.

Explanation / Answer

Comparison of 5-Stories to 2-Stories

Initial cost = $900,000 - $500,000

= $400,000

Annual income = $105,000 - $70,000

= $35,000

Salvage value = $300,000 - $200,000

= $100,000

PV of benefits = $35,000 * [1 - (1 + 8%)-20] / 8% + $100,000 / (1 + 8%)20

= $365,090

Benefit-cost ratio = $365,090 / $400,000

= 0.91 which is less than one which suggest 2-Stories is better than 5-Stories.

Therefore, option (3) is the correct solution

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.