Acme Investors is considering the purchase of the undeveloped Baker Tract of land. It is currently zoned use. If purchased, however, Acme must decide how to have the property rezoned for commercial use an develop the site. Based on its market study, Acme has made estimates for the two uses that it deems po office or retail. Based on its estimates, the land could be developed as follows: Rentable square feet Rents per square foot Operating expense ratio Average growth in NOI per annum Required return (r) Total construction cost per square foot Office 100,000 $ 42.00 Required: Which would be the highest and best use of this site? 40% 3% 13% $ 118 Retail 80,000 $ 52.50 50% 3% 14% $ 118

Acme Investors is considering the purchase of the undeveloped Baker Tract of land. It is currently zoned use. If purchased, however, Acme must decide how to have the property rezoned for commercial use an develop the site. Based on its market study, Acme has made estimates for the two uses that it deems po office or retail. Based on its estimates, the land could be developed as follows: Rentable square feet Rents per square foot Operating expense ratio Average growth in NOI per annum Required return (r) Total construction cost per square foot Office 100,000 $ 42.00 Required: Which would be the highest and best use of this site? 40% 3% 13% $ 118 Retail 80,000 $ 52.50 50% 3% 14% $ 118

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Consider how Kyler Valley River Park Lodge could use capital budgeting to decide whether the $12,000,000 River Park Lodge expansion would be a good investment. Assume Kyler Valley's managers developed the following estimates concerning the expansion: (Click the icon to view the estimates.) Assume that Kyler Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $850,000 at the end of its ten-year life. The average annual operating income from the expansion is $1,773,400 and the depreciation has been calculated as $1,115,000. Calculate the ARR. Round to two decimal places ARR Data Table 120 skiers Number of additional skiers per day Average number of days per year that weather conditions allow skiing at Kyler Valley 145 days Useful life of expansion (in years) 10 years 244 Average cash spent by each skier per day 78 Average variable cost of serving each skier per day 12,000,000 Cost of expansion 8% Discount rate
The table below shows the profit after tax and the book value of investment for three projects A, B, and C Required:Calculate the Accounting Rate of Return (ARR) of the three projects and recommend the best option based on your calculation.
Arnold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by body builders. The project requires use of an existing warehouse, which the firm acquired three years ago for $2 million and which it currently rents out for $130,000. Rental rates are not expected to change going forward. In addition to using the warehouse, the project requires an upfront investment into machines and other equipment of $1.2 million. This investment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc. expects to terminate the project at the end of eight years and to sell the machines and equipment for $424,000. Finally, the project requires an initial investment into net working capital equal to 10% of predicted first-year sales. Subsequently, net working capital is 10% of the predicted sales over the following year. Sales of protein bars are expected to be $4.9 million in the first year and to stay constant for eight…
Barnard Manufacturing is considering three capital investment proposals. At this time, Barnard only has funds available to pursue one of the three investments. |(Click the icon to review the proposals.) Which investment should Barnard pursue at this time? Why? Since each investment requires a different initial investment and presents a positive NPV, Barnard Manufacturing should use the profitability index to compare the profitability of each investment. Select the labels for the evaluation measure you determined above. Enter the amounts into the formula, beginning with Equipment A, and calculate the amount you will use to evaluate each investment. (Enter all amounts as positive numbers. Round the evaluation measure to two decimal places, X.XX.) - X Data Table Equipment A Equipment B Equipment C Present value of net cash inflows 1,832,478 S 1,865,471 $ 2,169,724 (1,650,881) (1,516,643) (1,749,777) Initial Investment 181,597 S 348,828 S 419,947 NPV Print Done
ACME Corporation distributes agricultural equipment. The board of directors is considering a proposal to establish a facility to manufacture an electronically controlled "intelligent" crop sprayer invented by a professor at a local university. This crop-sprayer project would require an investment of $10 million in assets and would produce an annual after-tax net benefit of $1.8 million over a service life of eight years. All costs and benefits are included in these figures. When the project terminates, the net proceeds from the sale of the assets would be $1 million (as shown). Compute the rate of return of this project.
Suppose the company plans to use a building that it owns to house the project. The building could be sold for $5 million after taxes and real estate commissions. How would that fact affect your answer? The potential sale of the building represents an opportunity cost of conducting the project in that building. Therefore, the possible after-tax sale price must be charged against the project as a cost. The potential sale of the building represents an opportunity cost of conducting the project in that building. Therefore, the possible before-tax sale price must be charged against the project as a cost. The potential sale of the building represents an externality and therefore should not be charged against the project. The potential sale of the building represents a real option and therefore should be charged against the project. The potential sale of the building represents a real option and therefore should not be charged against the project. -Select-IIIIIIIVV
The expansion plan of a business firm requires the purchase of a parcel on land on which to build a structure, which will need 5 years hence. The current costs are: land, P1,000,000.00; building P3,500,000.00. Since these are not needed immediately, the firm plans to defer the purchase of the land and the construction of the building until they are needed. If the value of the land and the cost of the building are expected to appreciate at the rates of 20% and 8% per annum, respectively, what will be the total cost of the land and structure 5 years hence?
Two potential real estate investments are under review by an investment firm. One is a 75,000 square foot office building in Portland, Oregon with a projected pre-tax leveraged IRR of 18.8% and the other is a 54-unit garden apartment building in Scranton, Pennsylvania with a projected pre-tax leveraged IRR of 14.5%. The investment firm should: a. Carefully weigh the projected returns relative to the potential risks of each investment during the due diligence process to determine whether either investment should be chosen b. Choose the Scranton apartment building with the lower expected IRR because it must be a safer investment c. Choose neither investment because both IRRs seem too good to be true in today’s market d.Choose the Portland industrial building with the higher expected IRR because it will definitely appreciate in value more over time
Best Flight, Inc., is considering three mutually exclusive alternatives forimplementing an automated passenger check-in counter at its hub airport.Each alternative meets the same service requirements, but differences in capital investment amounts and benefits (cost savings) exist among them. The study period is 10 years, and the useful lives of all three alternatives are also 10 years. Market values of all alternatives are assumed to be zero at the end of their useful lives. If the airline’s MARR is 10% per year, whichalternative should be selected in view of the cash-flow diagrams shown herewith attached.

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