Question

You are the engineer who is responsible about renovation of your company headquarters. Two plans were proposed. Plan X involves remodeling the existing headquarters at a cost of $ 2.25 million. The expected useful life of the existing headquarters after remodeling is 25 years and the annual maintenance and operating (M&O) cost would be $126,000 per year. Plan Y involves building a new headquarters and selling the existing one with a net price of $750,000 three years from now. A total of 5 thousands square meter is required for the new headquarters. The cost of the land is estimated to be $366,000 per thousand square meters. The size of the building is 1 thousand square meter and the building will be 10 stories. The construction cost of the building is $150 per square meter and requires 5 years assuming 2 stories are built per year. In addition, the architect and contractor fees are expected to be $420,000. The expected useful life of the new headquarters is 50 years and the annual maintenance and operating (M&O) cost would be $116,000 per year. If the interest rate is i 13% per year, evaluate which plan is better on the basis of: (a) the present worth analysis, and (b) the conventional B/C analysis Case pls with explained procedure. Pa, Pc , PW for plan X , (Pa, Ps, PW, for plan Y) lastly A(C+O) , Delta B and delta B/C

thats what we are supose to answer???

Answer 1

Plan X

a. Present worth Analysis

Present worth = -2250000 – 126000(P/A,13,25)

Using DCIF tables

(P/A,13,25) = (1+i) ^n -1 / i (1+i) ^n = (1+0.13) ^25 -1 / 0.13 (1+0.13) ^25 = 7.3299

Present worth = -2250000 – 126000(7.3299)

Present worth = -3173567.4

b. Conventional B/C analysis

Benefit cost (B/C) analysis = Present worth of Benefits / Present worth of Costs

Benefit cost (B/C) analysis = 0 / 3173567.4 = 0

Plan Y

a. Present worth Analysis

1. Construction cost

Year 01	$150*1000*2 = 300000
Year 02	$150*1000*2 = 300000
Year 03	$150*1000*2 = 300000
Year 04	$150*1000*2 = 300000
Year 05	$150*1000*2 = 300000

2. Cost of land for 1000m^2 = 366000; Cost of land for 5000m^2 = 1830000

Present worth = 750000(P/F,13,3) – 1830000 – 300000(P/A,13,5) – 420000 – 116000(P/A,13,50)

(P/A,13,5) = (1+i) ^n -1 / i (1+i) ^n = (1+0.13) ^5 -1 / 0.13 (1+0.13) ^5 = 3.5172

(P/A,13,50) = (1+i) ^n -1 / i (1+i) ^n = (1+0.13) ^50 -1 / 0.13 (1+0.13) ^50 = 7.6752

(P/F,13,3) = (1+i)^-n = (1+0.13)^-3 = 0.6931

Present worth = 750000(0.6931) – 1830000 – 300000(3.5172) – 420000 – 116000(7.6752)

Present worth = -$3675658.2

b. Conventional B/C analysis

Benefit cost (B/C) analysis = Present worth of Benefits / Present worth of Costs

Benefit cost (B/C) analysis = 750000(0.6931) /[ 1830000 + 300000(3.5172) + 420000 + 116000(7.6752)

= 518825 / 3156833.2

Benefit cost (B/C) analysis = 0.164

Based on present worth analysis Plan X can be selected and based on Benefit cost (B/C) analysis plan Y can be selected