A city is considering buying a piece of land for $500,000 and constructing an office complex on it.

A city is considering buying a piece of land for $500,000 and constructing an office complex on it. Their planning horizon is 20 years. Three mutually exclusive building designs (shown below) have been drawn up by an architectural firm. Use the AW benefit-cost ratio method and a MARR of 10% per year to determine which alternative, if any, should be recommended to the city council. Cost of the building including cost of the land Resale value of land and building at end of 20-year planning horizon Annual net rental income (after deducting all operating expenses) Design A $1,300,000 $500,000 $120,000 Design B $1,700,000 $900,000 $300,000 Design C $3,500,000 $2,000,000 $450,000 Complete the table and use it to solve the problem Design A Design B Design C AW of benefits AW of Costs Individual B/C ratio Is it justified? Use increament analysis to find the best option • • • Rank alternatives Set the base line Determine the incremental B/C ratios

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