Cornell has two options for upgrading their athletic facilities. The offcampus option costs only $2.5 million, but it will require frequent bus service to those facilities at an annual cost that starts at $200,000 and increases by 5% per year (buses, drivers’ and mechanics’ salaries, maintenance, road wear, etc.). Improving the on-campus facilities will cost $5.0 million, but no extra transportation costs are required. Both options involve an estimated annual maintenance cost of $1 million for about 30 years before new facilities will again be needed. Using benefit–cost ratio analysis, determine which option is more economically efficient. Use an interest rate of 10% per year.
Cornell has two options for upgrading their athletic facilities. The offcampus option costs only $2.5 million, but it will require frequent bus service to those facilities at an annual cost that starts at $200,000 and increases by 5% per year (buses, drivers’ and mechanics’ salaries, maintenance, road wear, etc.). Improving the on-campus facilities will cost $5.0 million, but no extra transportation costs are required. Both options involve an estimated annual maintenance cost of $1 million for about 30 years before new facilities will again be needed. Using benefit–cost ratio analysis, determine which option is more economically efficient. Use an interest rate of 10% per year.
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