Urban Development Corporation
Two alternative investment proposals are under consideration for a vacant owner by Urban Development Corporation. Plan A would require an immediate investment of $120,000 and first-year expenditure for property taxes, maintenance, and insurance of $4,000, with this amount expected to increase at a rate of $1,000 per year. Plan B would have a first cost of $170,000 and total first-year expenses of $9,000, with an increase of $1,000 per year. The economic life of each project is forecast to be 10 years; and at the end of this time, only the facilities from Plan B with a value of $50,000 are expected to salvage. During the life of the project, the facility in plan A is expected to produce $34,000 annually, whereas Plan B is expected to produce $42,000.
a) Determine the rate of return of each plan.
b) Determine the rate of return of the Additional investment required in Plan B compared with Plan A.
c) Which plan should Urban Development select if the company uses a MARR of 12 percent?