Question: There are three potential locations, as mutually exclusive alternatives, to build a recreation center. The cost of buying the land and construction as well as
There are three potential locations, as mutually exclusive alternatives, to build a recreation center. The cost of buying the land and construction as well as the resale value of land and building for each alternative have been provided in the below table. In addition, the operating and maintenance cost (O&M) for each alternative so as the benefits from the recreation center in each of the locations are listed in the table below. Use the B-C ratio method to determine which location, if any, should be recommended to build the recreation center over there.
Market interest rate is 10% per year and the inflation rate is 3% per year.
| Location A | Location B | Location C |
Cost of land and building; $ | $2,100,000 | $2,400,000 | $3,000,000 |
O&M costs; $/yr | $70,000 (in today’s dollar) | $100,000 | $90,000 |
Resale value of land and building at the end of year 20; $ | $500,000 (in today’s dollar) | $900,000 | $1,500,000 |
Annual Benefits; $/yr | $380,000 | $300,000 (in today’s dollar) | $320,000 |
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