Recently, a hotel owned by Cooper Luxury Real Estate had an unfortunate fire and
ID: 2711700 • Letter: R
Question
Recently, a hotel owned by Cooper Luxury Real Estate had an unfortunate fire and was completely destroyed. This hotel has an excellent location in a part of the city that is undergoing a growth spurt due to its location near Ranade University. There are two options for rebuilding: a showroom and office building or a student apartment. The table below illustrates costs:
Offices Apartments
First Cost
$340,000,000
490,000,000
Annual receipts
212,000,000
251,200,000
Annual expenses
59,100,000
88,000,000
Present value of the site as damaged
485,000,000
485,000,000
Increase in salvage due to renovation
120,000,000
$190,000,000
Expected salvage of site without renovation
266,000,000
266,000,000
This particular project has a 30 year life and uses a MARR of 10%. Which option is preferred and why?
First Cost
$340,000,000
490,000,000
Annual receipts
212,000,000
251,200,000
Annual expenses
59,100,000
88,000,000
Present value of the site as damaged
485,000,000
485,000,000
Increase in salvage due to renovation
120,000,000
$190,000,000
Expected salvage of site without renovation
266,000,000
266,000,000
Explanation / Answer
Ans) Year 1 to 30 Offices Apartment Annual Receipt 212,000,000 251,200,000 Annual expenses (59,100,000) (88,000,000) 152900000 163200000 30 years present value factor 10.36961 10.36961 1,585,513,369 1,692,320,352 Present value of the site -485000000 -485000000 Present value of the site 1,100,513,369 1,207,320,352 Salvage value 120000000 190000000 Present value of interest factor 0.05731 0.05731 6877200 10888900 Total gain after innovation (including First Cost) 1,093,636,169 1,196,431,452 First Cost (340,000,000) (490,000,000) 753,636,169 706,431,452 Total Investment First Cost 340,000,000 490,000,000 Salvage Value 485,000,000 485000000 825,000,000 975,000,000 Rate of return 91% 72% We better to accept the office project
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