The city engineer has prepared two plans for the construction and maintenance of roads in the city park. Both plans are designed to provide the anticipated road and road maintenance requirements for the next 40 years. The minimum attractive rate of return used by the city is 7%.
Plan A is a three-stage development program: $300,000 is to be spent immediately, followed by $250,000 at the end of 15 years and $300,000 at the end of 30 years. Maintenance will be $75,000 per year for the first 15 years, $125,000 per year for the next 15 years, and $250,000 per year for the final 10 years.
Plan B is a two-stage program: $450,000 is required immediately (including money for special equipment), followed by $50,000 at the end of 15 years. Maintenance will be $100,000 per year for the first 15 years and $125,000 for each of the subsequent years. At the end of 40 years, it is believed that the equipment can be sold for $150,000.
(a) Use a conventional benefit-cost ratio analysis to determine which plan should be chosen.
(b) If you favored Plan B, what value of MARR. would you use in the computations? Explain.