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Recently, a hotel owned by Cooper Luxury Real Estate had an unfortunate fire and

ID: 2711700 • Letter: R

Question

Recently, a hotel owned by Cooper Luxury Real Estate had an unfortunate fire and was completely destroyed.   This hotel has an excellent location in a part of the city that is undergoing a growth spurt due to its location near Ranade University. There are two options for rebuilding: a showroom and office building or a student apartment. The table below illustrates costs:

Offices                                             Apartments

First Cost

$340,000,000

490,000,000

Annual receipts

212,000,000

251,200,000

Annual expenses

59,100,000

88,000,000

Present value of the site as damaged

485,000,000

485,000,000

Increase in salvage due to renovation

120,000,000

$190,000,000

Expected salvage of site without renovation

266,000,000

266,000,000

This particular project has a 30 year life and uses a MARR of 10%. Which option is preferred and why?

First Cost

$340,000,000

490,000,000

Annual receipts

212,000,000

251,200,000

Annual expenses

59,100,000

88,000,000

Present value of the site as damaged

485,000,000

485,000,000

Increase in salvage due to renovation

120,000,000

$190,000,000

Expected salvage of site without renovation

266,000,000

266,000,000

Explanation / Answer

Ans) Year 1 to 30 Offices Apartment Annual Receipt          212,000,000              251,200,000 Annual expenses          (59,100,000)              (88,000,000) 152900000 163200000 30 years present value factor 10.36961 10.36961      1,585,513,369          1,692,320,352 Present value of the site -485000000 -485000000 Present value of the site      1,100,513,369          1,207,320,352 Salvage value 120000000 190000000 Present value of interest factor 0.05731 0.05731 6877200 10888900 Total gain after innovation (including First Cost)      1,093,636,169          1,196,431,452 First Cost        (340,000,000)           (490,000,000)          753,636,169              706,431,452 Total Investment First Cost          340,000,000              490,000,000 Salvage Value          485,000,000 485000000          825,000,000              975,000,000 Rate of return 91% 72% We better to accept the office project