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. Betty samuels, a newly hired civil engineer, has been assigned to make the analysis. she 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         875,000                    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 betty make?

(c)discuss the approach

(d)how you determined the solution to this investment decision

(e)what conclusions you reached

(f) write a brief summary of the calculations

Explanation / Answer

Based on the above analysis building a 4 story building is most profitable for the owner as it will provide maximum positive NPV. Using 19% MARR as Discount Rate we could see that building a 4 stoy would be most porfitable as it would add $285,829.69 value to the owner.

Investment Return/Year NPV Salvage Value Final NPV after discounting Salvage Value at 15th year at 10% discount rate Keep Parking Lot 200,000 22,000 ($32,666.25) 200,000 $15,212.16 1 Story Building 400000 60000 56364.77 400,000 $152,121.59 2 Story Building 555,000 72,000 (7362.27) 555,000 $125,500.32 3 Story Building 750,000 100,000 10607.95 750,000 $190,151.99 4 Story Building 875,000 105,000 76361.65 875,000 $285,829.69 5 Story Building 1,000,000 120,000 (87270.46) 1,000,000 $152,121.59

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