Develop a Corner Lot A man owns a corner lot. He must decide which of several al

Question

Develop a Corner Lot

A man owns a corner lot. He must decide which of several alternatives to select in trying to obtain a desirable return on his investment. He wants a rate of return of at least 6% on his investments. After conducting a feasibility study which was completed at a cost of $5,000. he decides that the two best alternatives are:
1) Build a soft ice cream stand at a cost of $80,000. which will produce an annual income of $11,000 from which annual property taxes of $3000. must be paid. The ice cream stand is expected to have a life of 20 years with no salvage value at the end of that period.

Build a gas station for $120,000. The annual property tax on the gas station will be $5,000. The income from the gas station will be $16,000. per year. There will be no salvage value for the gas station at the end of its 20 year life.
1. What is the net equivalent annual benefit of the Ice Cream Stand:
(Express your answer to 3 significant digits with trailing zeros as required: XXX00., or XXX0., or XXX. for positive values or -XXX00., -XXX0. or -XXX. for negative values)


The Net Present Worth of the Gas Station is:
(Express your answer to 3 significant digits with trailing zeros as required: XXX00., or XXX0., or XXX. for positive values or -XXX00., -XXX0. or -XXX. for negative values.)
(Points : 5)



What should the owner do? (Points : 5)
Leave the Lot Vacant
Build the Gas Station
Build the Ice Cream Stand

Explanation / Answer

FIRST NPW FOR ICE CREAM ANNUAL REVENUE = 11000 -3000 = 8000 = -80000 + 8000((1+.06)^20 -1 )/(.06(1+.06)^20) =11759.3697 now for gas station annual revenue = 16000 - 5000 = 11000 npw= -120000 + 11000((1+.06)^20 -1 )/(.06(1+.06)^20) =6169.1334 He should choose an ICE CREAM CORNER Build the Ice Cream Stand

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