A government agency is planning a new office building close to its current headquarters. Four proposed...
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A government agency is planning a new office building close to its current headquarters. Four proposed sites are to be evaluated. Any of these sites will save the agency $ 700,000 per year, since two of its current satellite offices will no longer need to be rented. The agency uses a 6.00 % interest rate and assumes that the building and its benefits will last for 40 years. Based on a benefit- cost analysis what should the agency do? Site A: initial cost = $8.60M; annual O&M = 0.12M; Site B: initial cost = $8.10M; annual O&M = 0.16M; Site C: initial cost = $7.50M; annual O&M = 0.20M; Site D: initial cost = $6.80M; annual O&M = 0.30M; Solution: • The four alternatives should be rearranged below in order of . Considering that is an alternative. • Assume that annual operating cost is a disbenefit (e.g., negative benefit but not a cost) • Incremental Analysis: Benefit- Cost Ratio Computations: (Present Worth) . 1. 2. 1): PWAB 2): PWAC 3): Thus (AB) pw ΔΕ AC 4): 1): PWAB + 2): PWAC 4): 3. B → AB 3): Thus (A) PV PW = AC → M; M; ◆ is retained. M; M; = cost; ◆ is retained. 4. 1): PWAB 2): PWAC 3): Thus 4): A A÷ AB AC 1): PWAB 2): PWAC 4): pw 4 < 3): Thus (AB)pw ΔΕ AC M; M; ◆ is retained. M; M; ◆ is retained. A government agency is planning a new office building close to its current headquarters. Four proposed sites are to be evaluated. Any of these sites will save the agency $ 700,000 per year, since two of its current satellite offices will no longer need to be rented. The agency uses a 6.00 % interest rate and assumes that the building and its benefits will last for 40 years. Based on a benefit- cost analysis what should the agency do? Site A: initial cost = $8.60M; annual O&M = 0.12M; Site B: initial cost = $8.10M; annual O&M = 0.16M; Site C: initial cost = $7.50M; annual O&M = 0.20M; Site D: initial cost = $6.80M; annual O&M = 0.30M; Solution: • The four alternatives should be rearranged below in order of . Considering that is an alternative. • Assume that annual operating cost is a disbenefit (e.g., negative benefit but not a cost) • Incremental Analysis: Benefit- Cost Ratio Computations: (Present Worth) . 1. 2. 1): PWAB 2): PWAC 3): Thus (AB) pw ΔΕ AC 4): 1): PWAB + 2): PWAC 4): 3. B → AB 3): Thus (A) PV PW = AC → M; M; ◆ is retained. M; M; = cost; ◆ is retained. 4. 1): PWAB 2): PWAC 3): Thus 4): A A÷ AB AC 1): PWAB 2): PWAC 4): pw 4 < 3): Thus (AB)pw ΔΕ AC M; M; ◆ is retained. M; M; ◆ is retained.
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Financial Accounting Information For Decisions
ISBN: 978-0324672701
6th Edition
Authors: Robert w Ingram, Thomas L Albright
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