Question

Suppose the most productive use of a particular site is as a manufacturing plant that will generate revenues of $12,000,000 per year with raw material costs and operating expenses (other than net rent) of $7,000,000 per year, and construction costs (for the plant and equipment) that can be paid for with a perpetual loan with interest of $3,000,000 per year. According to the residual theory, how much is this site worth in terms of annual land rent?

Answer 1

$2,000,000

Step-by-step explanation:

The computation of the site worth is shown below:

= Revenues generated - operating expenses - interest on perpetual loan

= $12,000,000 - $7,000,000 - $3,000,000

= $2,000,000

Based on residual theory we deducted the operating expenses and the interest perpetual loan from the revenues generated so that the accurate value can come.