six alternatives shoul The owner of a downtown a civil engineering consulting fi

Question

six alternatives shoul The owner of a downtown a civil engineering consulting firm to advise him on the economic feasibility of constructing an office building on the site. Betty Samuels, a newly hired civil engineer, has been assigned to make the analysis. She has assembled the following data: parking lot has employed 8-33 Total Alternative Sell parking lot Keep parking lot Build 1-story building400,000 Build 2-story building 555,000 Build 3-story building 750,000 Build 4-story building 875,000 Build 5-story building 1,000,000 Total Net Annual Investment Revenue 0 22,000 60,000 72,000 100,000 105,000 120,000 200,000 Includes the value of the land. The analysis period is to be 15 years. For all alternatives, the property has an estimated resale (salvage) value at the end of 15 years equal to the present total investment. (a) Construct a choice table for interest rates from 0% to 100%. (b) If the MARR is 10%, what recommendation should Betty make?

Explanation / Answer

Present value annuity factor at 15% for 15 years

1-(1+r)^-n / r

1-(1.15)^-15 /.15

5.847

PVF at 15% at the end of fifteen Year

1/(1+r)^n

1/(1.15)^15

0.122894

sell parking lot

Present value of cash inflow

(total net annual revenue* PVAF)+(salvage value*PVF)

200000

Present value of cash outflow

0

Net present value

present value of cash inflow-cash outflow

200000

Keep parking lot

Present value of cash inflow

(total net annual revenue* PVAF)+(salvage value*PVF)

(22000*5.847)+(200000*.1228)

153194

Present value of cash outflow

200000

Net present value

present value of cash inflow-cash outflow

-46806

Build 1 story building

Present value of cash inflow

(total net annual revenue* PVAF)+(salvage value*PVF)

(60000*5.847)+(400000*.1228)

399940

Present value of cash outflow

400000

Net present value

present value of cash inflow-cash outflow

-60

Build 2 story building

Present value of cash inflow

(total net annual revenue* PVAF)+(salvage value*PVF)

(72000*5.847)+(555000*.1228)

489138

Present value of cash outflow

555000

Net present value

present value of cash inflow-cash outflow

-65862

Build 3 story building

Present value of cash inflow

(total net annual revenue* PVAF)+(salvage value*PVF)

(100000*5.847)+(750000*0.1228)

676800

Present value of cash outflow

750000

Net present value

present value of cash inflow-cash outflow

-73200

Build 4 story building

Present value of cash inflow

(total net annual revenue* PVAF)+(salvage value*PVF)

(105000*5.847)+(875000*0.1228)

721385

Present value of cash outflow

875000

Net present value

present value of cash inflow-cash outflow

-153615

Build 5 story building

Present value of cash inflow

(total net annual revenue* PVAF)+(salvage value*PVF)

(120000*5.847)+(1000000*0.1228)

824440

Present value of cash outflow

1000000

Net present value

present value of cash inflow-cash outflow

-175560

In all the given option maximum net present value is of option one to sell the parking lot as it results in present value of 200000 and rest all option gives negative net present value

Present value annuity factor at 15% for 15 years

1-(1+r)^-n / r

1-(1.15)^-15 /.15

5.847

PVF at 15% at the end of fifteen Year

1/(1+r)^n

1/(1.15)^15

0.122894

sell parking lot

Present value of cash inflow

(total net annual revenue* PVAF)+(salvage value*PVF)

200000

Present value of cash outflow

0

Net present value

present value of cash inflow-cash outflow

200000

Keep parking lot

Present value of cash inflow

(total net annual revenue* PVAF)+(salvage value*PVF)

(22000*5.847)+(200000*.1228)

153194

Present value of cash outflow

200000

Net present value

present value of cash inflow-cash outflow

-46806

Build 1 story building

Present value of cash inflow

(total net annual revenue* PVAF)+(salvage value*PVF)

(60000*5.847)+(400000*.1228)

399940

Present value of cash outflow

400000

Net present value

present value of cash inflow-cash outflow

-60

Build 2 story building

Present value of cash inflow

(total net annual revenue* PVAF)+(salvage value*PVF)

(72000*5.847)+(555000*.1228)

489138

Present value of cash outflow

555000

Net present value

present value of cash inflow-cash outflow

-65862

Build 3 story building

Present value of cash inflow

(total net annual revenue* PVAF)+(salvage value*PVF)

(100000*5.847)+(750000*0.1228)

676800

Present value of cash outflow

750000

Net present value

present value of cash inflow-cash outflow

-73200

Build 4 story building

Present value of cash inflow

(total net annual revenue* PVAF)+(salvage value*PVF)

(105000*5.847)+(875000*0.1228)

721385

Present value of cash outflow

875000

Net present value

present value of cash inflow-cash outflow

-153615

Build 5 story building

Present value of cash inflow

(total net annual revenue* PVAF)+(salvage value*PVF)

(120000*5.847)+(1000000*0.1228)

824440

Present value of cash outflow

1000000

Net present value

present value of cash inflow-cash outflow

-175560

In all the given option maximum net present value is of option one to sell the parking lot as it results in present value of 200000 and rest all option gives negative net present value

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