The first cost of a new building is $3,000,000. Target ROI on investments is 20%
ID: 2462588 • Letter: T
Question
The first cost of a new building is $3,000,000. Target ROI on investments is 20%. It is estimated to have a life of 30 years with salvage value of $50,000. It is possible that it will last as long as 40 years with a salvage value of zero and teardown costs of $ 100,000. Or it may last 25 years and could be sold for $100,000. Annual taxes, insurance, maintenance, and other annual costs are expected to be $100,000 per year, but they could be as high as $150,000 per year or as low as $90,000 per Using what-if calculations, determine the pessimistic, optimistic, and most likely total annua costs, j4t, of the structure.Explanation / Answer
PERT (Program Evaluation And Review Technique) is the most commonly used method in three point estimation technique.
Three PEART estimates are as follows:
· Most Likely Cost (Cm): This cost estimate considers everything goes as normal.
· Pessimistic Cost (Cp): This considers the worst case and it assumes that almost everything goes wrong.
· Optimistic Cost (Co): This estimate considers the best case and assumes that everything goes better than planned.
PERT Estimate formula is:
Ce = (Co + 4Cm + Cp)/6
Where, Ce = Expected Cost
Estimates derived from this technique are better than the two techniques discussed above and provide a more accurate estimate.
Calculation of estimated cost
Particulars
Most Likely Cost
Pessimistic Cost
Optimistic Cost
Cm
Cp
Co
Initial Cost - A
3,000,000.00
3,000,000.00
3,000,000.00
Less:
Depreciation cost
savings
Life of the asset
30
25
40
Per Year
98,333.33
116,000.00
77,500.00
(3000000-50000)/30
(3000000-100000)/25
(3000000+100000)/40
Total Savings
2,950,000.00
3,480,000.00
2,325,000.00
Annual Factor @ 20%
4.9789
4.9475
4.9966
For 30 Years
For 25 Years
For 40 Years
PV of Savings cost in
Depreciation - B
489,591.83
573,910.00
387,236.50
Solvage Value /
50,000.00
100,000.00
(100,000.00)
(tears cost)
PV Factor @ 20 %
0.0042
0.0105
0.0007
For 30th Year
For 25th Year
For 40th Year
Savings in Cost - C
210.64
1,048.26
(68.04)
Annual Taxes and Insurance
100,000.00
150,000.00
90,000.00
Annual Factor @ 20%
4.9789
4.9475
4.9966
For 30 Years
For 25 Years
For 40 Years
Total PV of Cost - D
497,890.00
742,125.00
449,694.00
Total Cost
(A-B-C+D)
3,008,087.53
3,167,166.74
3,062,525.54
PERT Estimate formula is:
Ce = (Co + 4Cm + Cp)/6
Where, Ce = Expected Cost
Expected Cost =
3,043,673.73
(3062525.54+4*3008087.53+3167166.74)/6
Calculation of estimated cost
Particulars
Most Likely Cost
Pessimistic Cost
Optimistic Cost
Cm
Cp
Co
Initial Cost - A
3,000,000.00
3,000,000.00
3,000,000.00
Less:
Depreciation cost
savings
Life of the asset
30
25
40
Per Year
98,333.33
116,000.00
77,500.00
(3000000-50000)/30
(3000000-100000)/25
(3000000+100000)/40
Total Savings
2,950,000.00
3,480,000.00
2,325,000.00
Annual Factor @ 20%
4.9789
4.9475
4.9966
For 30 Years
For 25 Years
For 40 Years
PV of Savings cost in
Depreciation - B
489,591.83
573,910.00
387,236.50
Solvage Value /
50,000.00
100,000.00
(100,000.00)
(tears cost)
PV Factor @ 20 %
0.0042
0.0105
0.0007
For 30th Year
For 25th Year
For 40th Year
Savings in Cost - C
210.64
1,048.26
(68.04)
Annual Taxes and Insurance
100,000.00
150,000.00
90,000.00
Annual Factor @ 20%
4.9789
4.9475
4.9966
For 30 Years
For 25 Years
For 40 Years
Total PV of Cost - D
497,890.00
742,125.00
449,694.00
Total Cost
(A-B-C+D)
3,008,087.53
3,167,166.74
3,062,525.54
PERT Estimate formula is:
Ce = (Co + 4Cm + Cp)/6
Where, Ce = Expected Cost
Expected Cost =
3,043,673.73
(3062525.54+4*3008087.53+3167166.74)/6
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