The owner of a downtown parking lot has employed a civil engineering consulting

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. Bill Samuels, a newly hired civil engineer, has been assigned to make the analysis. He has assembled the following data: *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. If the MARR is 10%, what recommendation should Bill make?

Explanation / Answer

Present Worth (PW) of all options is computed as follows.

PW, Parking lot ($) = - 200,000 + 22,000 x P/A(10%, 15) + 200,000 x P/F(10%, 15)

= - 200,000 + 22,000 x 7.6061** + 200,000 x 0.2394** = - 200,000 + 167,334 + 47,880 = 15,214

PW, 1-Storey Building ($) = - 400,000 + 60,000 x P/A(10%, 15) + 400,000 x P/F(10%, 15)

= - 400,000 + 60,000 x 7.6061** + 400,000 x 0.2394** = - 400,000 + 456,366 + 95,760 = 152,126

PW, 2-Storey Building ($) = - 555,000 + 72,000 x P/A(10%, 15) + 555,000 x P/F(10%, 15)

= - 555,000 + 72,000 x 7.6061** + 555,000 x 0.2394** = - 555,000 + 547,639 + 132,867 = 125,506

PW, 3-Storey Building ($) = - 750,000 + 100,000 x P/A(10%, 15) + 750,000 x P/F(10%, 15)

= - 750,000 + 100,000 x 7.6061** + 750,000 x 0.2394** = - 750,000 + 760,610 + 179,550 = 190,160

PW, 4-Storey Building ($) = - 875,000 + 105,000 x P/A(10%, 15) + 875,000 x P/F(10%, 15)

= - 875,000 + 105,000 x 7.6061** + 875,000 x 0.2394** = - 875,000 + 798,641 + 209,475 = 133,116

PW, 5-Storey Building ($) = - 1,000,000 + 120,000 x P/A(10%, 15) + 1,000,000 x P/F(10%, 15)

= - 1,000,000 + 120,000 x 7.6061** + 1,000,000 x 0.2394** = - 1,000,000 + 912,732 + 239,400 = 152,132

Since PW of 3-storey buildings is highest, this project should be accepted.

**From P/A and P/F Factor tables

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.