Using rate of return analysis

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Reference no: EM131456131

Your life-long savings account is earning 7% at the local bank, and you are studying two possible alternative uses of some of those funds. One is to erect a gas station on the corner lot you own. It would cost $325,000 for construction, initial inventories, and other start-up expenses. You think you could generate net annual revenues of $75,000 for eight years, after which you think you could sell the station for $100,000. The other option is to erect an apartment building on the same property.[Mutually Exclusive alternates] This project would have a first cost of $550,000 and would generate an estimated $120,000 per year of net revenues. You would plan to sell it after eight years for an estimated $200,000. Note that there are THREE alternatives, including "do nothing" (which means leave all your money in your savings account).

a) Using a Present Worth or EACF analysis, which of the three would you do? Why?

b) Using a Rate of Return analysis, which would you select? [incremental analysis?]

c) At what MARR would the two alterntiave be equal.

Reference no: EM131456131

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