Question

Bronson Building Inc. is considering a possible investment project, consisting of constructing an office building and then renting it out for use to various local businesses. The initial cost of acquiring the land and constructing the building (first cost) is $21,000,000. The building is expected to be sold for $2,000,000 in 23 years, at the end of the last year of the project. Annual revenue from collecting rents is expected to be $4,000,000, while annual maintenance and operating expenses are projected to equal $2,000,000. Using MARR of 10%, compute the present worth of the project. Note: if the present worth is negative you must include the negative sign with your answer

Answer 1

Answer:The present worth of the project for Bronson Building Inc is $6,389,137.

In order to calculate the present worth, follow these steps:

1. The given information is:

Initial cost (first cost) = $18,000,000

Annual revenue = $5,000,000

Annual expenses = $2,000,000

Net annual cash flow = Annual revenue - Annual expenses = $5,000,000 - $2,000,000 = $3,000,000

MARR = 11%

Project duration = 18 years

Sale price at the end of the project = $8,000,000

2. To calculate the present worth, we first need to find the present value of the net annual cash flows using the MARR as the discount rate. Then, we will add the present value of the sale price and subtract the initial cost.

Present value of net annual cash flows (PV_ACF) = Net annual cash flow * [(1 - (1 + MARR)^(-duration)) / MARR]

PV_ACF = $3,000,000 * [(1 - (1 + 0.11)^(-18)) / 0.11] = $3,000,000 * 7.696 = $23,088,000

3. Find the present value of the sale price at the end of the project.

Present value of sale price (PV_SP) = Sale price / (1 + MARR)^duration

PV_SP = $8,000,000 / (1 + 0.11)^18 = $8,000,000 / 6.146 = $1,301,137

4. Calculate the present worth of the project.

Present worth = PV_ACF + PV_SP - Initial cost

Present worth = $23,088,000 + $1,301,137 - $18,000,000 = $6,389,137

Explanation: