the owner of a downtown parking lot has employed a civil engineering consulting
ID: 2797415 • Letter: T
Question
the owner of a downtown parking lot has employed 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. he has assembled the following data
alternative total investment total net annual revenue
sell parking lot 0 0
keep parking lot 200,000 22,000
build 1 story building 400,000 60,000
build 2 story building 555,000 72,000
build 3 story building 750,000 100,000
build 4 story building 875,000 105,000
build 5 story building 1,000,000 120,000
The analysis period is 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 investement.
(a) constuct a choice table for interest rate from 0% to 100%
(b)if the MARRR is 10%, what recommendation should betty make?
(c)discuss the approach
(d)how you determined the solution to this investment decision
(e)what conclusions you reached
(f) write a brief summary of the calculations
Explanation / Answer
Investment
Return/Year
NPV
Salvage Value
Final NPV after discounting Salvage Value at 15th year at 10% discount rate
Keep Parking Lot
200,000
22,000
($32,666.25)
200,000
$15,212.16
1 Story Building
400000
60000
56364.77
400,000
$152,121.59
2 Story Building
555,000
72,000
(7362.27)
555,000
$125,500.32
3 Story Building
750,000
100,000
10607.95
750,000
$190,151.99
4 Story Building
875,000
105,000
76361.65
875,000
$285,829.69
5 Story Building
1,000,000
120,000
(87270.46)
1,000,000
$152,121.59
Based on the above analysis building a 4 story building is most profitable for the owner as it will provide maximum positive NPV. Using 10% MARR as Discount Rate we could see that building a 4 story would be most profitable as it would add $285,829.69 value to the owner.
Investment
Return/Year
NPV
Salvage Value
Final NPV after discounting Salvage Value at 15th year at 10% discount rate
Keep Parking Lot
200,000
22,000
($32,666.25)
200,000
$15,212.16
1 Story Building
400000
60000
56364.77
400,000
$152,121.59
2 Story Building
555,000
72,000
(7362.27)
555,000
$125,500.32
3 Story Building
750,000
100,000
10607.95
750,000
$190,151.99
4 Story Building
875,000
105,000
76361.65
875,000
$285,829.69
5 Story Building
1,000,000
120,000
(87270.46)
1,000,000
$152,121.59
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