A real-estate developer seeks to determine the most economical height for a newoffice building, which will be sold after five years. The developer uses an interest rate of i for itsevaluation. The relevant net revenues and salvage values on after-tax basis are given below:Building CostAnnual Lease RevenueResale Value2 floors 3 floors 4 floors 5 floors$500,000 $750,000 $1,250,000 $2,000,000$199,100 $169,200 $149,200 $378,150$600,000 $900,000 $2,000,000 $3,000,000(a) The developer is uncertain about the exact interest rate i, but is certain that it is in the rangefrom 10% to 25%. For each value of i = {10%, 15%, 20%, 25%}, determine which buildingoption is the most economical.(b) Suppose that the developer's interest rate turns out to be 15%. If the the resale costs are 30%overestimated for each height plan (i.e., the resale value turns out to be 70% of $600,000 forthe 2 floors, 70% of $900,000, and so on), how does that scenario affect the PW values for thefloor options?

Present worth is computed by calculating and adding present value of cash flows associated with…

A real-estate developer seeks to determine the most economical height for a new office building, which will be sold after five years. The developer uses an interest rate of i for its evaluation. The relevant net revenues and salvage values on after-tax basis are given below: Building Cost Annual Lease Revenue Resale Value 2 floors 3 floors 4 floors $500,000 $750,000 $1,250,000 $199,100 $169,200 $149,200 $900,000 $2,000,000 $600,000 5 floors $2,000,000 $378,150 $3,000,000 (a) The developer is uncertain about the exact interest rate i, but is certain that it is in the range from 10% to 25%. For each value of i = {10%, 15%, 20%, 25%}, determine which building option is the most economical. (b) Suppose that the developer's interest rate turns out to be 15%. If the the resale costs are 30% overestimated for each height plan (i.e., the resale value turns out to be 70% of $600,000 for the 2 floors, 70% of $900,000, and so on), how does that scenario affect the PW values for the floor options?

A real-estate developer seeks to determine the most economical height for a new office building, which will be sold after five years. The developer uses an interest rate of i for its evaluation. The relevant net revenues and salvage values on after-tax basis are given below: Building Cost Annual Lease Revenue Resale Value 2 floors 3 floors 4 floors $500,000 $750,000 $1,250,000 $199,100 $169,200 $149,200 $900,000 $2,000,000 $600,000 5 floors $2,000,000 $378,150 $3,000,000 (a) The developer is uncertain about the exact interest rate i, but is certain that it is in the range from 10% to 25%. For each value of i = {10%, 15%, 20%, 25%}, determine which building option is the most economical. (b) Suppose that the developer's interest rate turns out to be 15%. If the the resale costs are 30% overestimated for each height plan (i.e., the resale value turns out to be 70% of $600,000 for the 2 floors, 70% of $900,000, and so on), how does that scenario affect the PW values for the floor options?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 6CE

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