the owner of a downtown parking lot has employed a civil engineering consulting
ID: 1099856 • Letter: T
Question
the owner of a downtown parking lot has employed a civil engineering consulting frim to advise him on the economic feasibility of constructing an office building on the site. bill 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 875,500 105,000
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 bill make?
Explanation / Answer
This problem is one of neither fixed input nor fixed output. When the estimated resale value equals the present total investment we have the special case where: A = Pi or i = A/P
NPV = 0 = (-P) + (P/A) + (P/F=P)
Reduces to simple interest of i = A/P
Alternative
P*
A*
i
P
A
i
Decision
Sell Parking Lot
0
0
0%
Keep Parking Lot
$200
$22
11%
$200
$22
11%
Keep Lot
Build 1 story building
$400
$60
15%
$200
$38
19%
1 story
Build 2 story
$555
$72
12.9%
$155
$12
7.7%
1 story
Build 3 story
$750
$100
13.3%
$350
$40
11.4%
3 story
Build 4 story
$875
$105
12%
$125
$5
4.0%
3 story
Build 5 story
$1,000
$120
12%
$250
$20
8.0%
3 story
Ans: Choose 3-story
Alternative
P*
A*
i
P
A
i
Decision
Sell Parking Lot
0
0
0%
Keep Parking Lot
$200
$22
11%
$200
$22
11%
Keep Lot
Build 1 story building
$400
$60
15%
$200
$38
19%
1 story
Build 2 story
$555
$72
12.9%
$155
$12
7.7%
1 story
Build 3 story
$750
$100
13.3%
$350
$40
11.4%
3 story
Build 4 story
$875
$105
12%
$125
$5
4.0%
3 story
Build 5 story
$1,000
$120
12%
$250
$20
8.0%
3 story
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