Question

A developer has 10,000 m2 that could be developed as retail space or movie theatres.
The retail space will cost $160.00 per m2 to develop and the monthly rental income will be $1.90 per m2. The theatres will cost $260.00 per m2 to develop and will produce monthly rental income of $2.75 per m2. The developer's MARR is 12%.

On the basis of present worth, which alternative is best with at 20-year life?

(Use Blank #1 for the retail space; Blank #2 for theatres; Blank #3 for the best alternative)

Answer 1

ANSWER:

I = 12% PER YEAR OR 12% / 12 = 1% PER MONTH

1) RETAIL SPACE:

Initial cost = retail space cost * area = $160 * 10,000 = $1,600,000

monthly rental income = rental income per m^2 * area = $1.9 * 10,000 = $19,000

n = 20 years or 240 months

pw = initial cost + monthly rental income(p/a,i,n)

pw = - 1,600,000 + 19,000(p/a,1%,240)

pw = - 1,600,000 + 19,000 * 90.819 = - 1,600,000 + 1,725,561 = 125,561

2) THEATRES:

Initial cost = retail space cost * area = $260 * 10,000 = $2,600,000

monthly rental income = rental income per m^2 * area = $2.75 * 10,000 = $27,500

n = 20 years or 240 months

pw = initial cost + monthly rental income(p/a,i,n)

pw = - 2,600,000 + 27,500(p/a,1%,240)

pw = - 2,600,000 + 27,500 * 90.819 = - 2,600,000 + 2,497,522.5 = - 102,477.5

SINCE THE PW OF THE RETAIL POSITIVE WHILE THAT OF THEATRES IS NEGATIVE THEREFORE RETAIL SPACE IS THE BEST ALTERNATIVE.