A manufacturing company is in need of 3000 square meters for expansion because of a new 3-year contract it just won. The company is considering the purchase of land for $50,000 and erecting a temporary metal structure on it at a cost of $90 per square meter. At the end of the 3-year period, the company expects to be able to sell the land for $55,000 and the building for $60,000. Alternatively, the company can lease space for $3 per square meter per month, payable at the beginning of each year.
Use an AW-based rate of return equation to determine which alternative is preferred. The MARR is 28% per year.
Alternative R has a first cost of $100,000, annual M&O costs of $50,000, and a $20,000 salvage value after 5 years. Alternative S has a first cost of $175,000 and a $40,000 salvage value after 5 years, but its annual M&O costs are not known.
Determine the M&O costs for alternative S that would yield an incremental rate of return of 20% per year.
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