Height 2 Hoors 3Floors 4 Floors S Floors First cost (net after tax) $500,000 $750,000 $1,250,000 $2,000,000 $149,200 Lease revenue $199,100 $169,200 $378,150 Net resale value (after tax) $600,000 $900,000 $2,000,000 $3,000,000
Height 2 Hoors 3Floors 4 Floors S Floors First cost (net after tax) $500,000 $750,000 $1,250,000 $2,000,000 $149,200 Lease revenue $199,100 $169,200 $378,150 Net resale value (after tax) $600,000 $900,000 $2,000,000 $3,000,000
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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Question
A real-estate developer seeks to determine the most economical height for a new office building. The building will be sold after five years. The relevant net annual revenues and salvage values are as follows:
(a) The developer is uncertain about the interest rate (i) to use but is certain
that it is in the range of 5% to 20%. For each building height, find the range
of values of i for which that building height is the most economical.
(b) Suppose that the developer's interest rate is known to be 15%. In terms of
PW, what would be the cost of an error in overestimation of resale value
such that the true value is 10% lower than the original estimate?
Transcribed Image Text:Height
2 Hoors 3Floors
4 Floors
S Floors
First cost (net after tax)
$500,000
$750,000
$1,250,000 $2,000,000
$149,200
Lease revenue
$199,100
$169,200
$378,150
Net resale value (after tax)
$600,000
$900,000
$2,000,000 $3,000,000
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