Complete Question:
Gaber Land Corp. is evaluating a 4-acre waterfront property for development into rental condominiums. The front 2-acre lot is more expensive to purchase than the rear 2-acre lot, and condo leases closer to the waterfront can be more expensive than those units in the rear. Gaber is considering a design that includes a 32-unit building on each lot.
Data includes the following:
Initial Costs
Lot purchase prices: $400,000/acre front lot, $100,000/acre back lot Legal fees, applications, permits, etc.: $80,000
Site clearing and preparation: $3000/acre
Paving roadways, parking, curbs, and sidewalks: 25% of total lot at $40,000/acre.
Construction costs: $3,000,000 per building
Recurring Costs
Taxes and insurance: $5000/month per building
Landscaping: 25% of lot at S1000/acre/month
Security: $1000 building for $1500/month
Other costs: $2000/month
Revenue (assume 90% annual occupancy)
Front lot units: $2500/unit/month
Rear lot units: $1750/unit/month
Other revenue: $5000/month
Answer the following: (1) Use the concept of the per-unit model to estimate the total initial cost. annual cost, and annual revenue of this prospective project, and (2) If you made the simplifying assumption of no changes to costs and revenues for 10 years, estimate the profitability of this prospective investment ignoring the effects of money's value over time.
Answer:
Gaber Land Corp.
1a. Total Initial cost: $193,252,000
1b. Annual cost: $5,064,000
1c. Annual revenue: $5,935,200
2. Profitability of Project for 10 years:
Total Revenue $5,935,200 x 10 years = $59,352,000
Total costs $5,064,000 x 10 years = (50,640,000)
Profitability $8,712,000
The profitability totalling $8,712,000 for ten years will be reduced by the allocated cost of building for the same period in order to determine the net income.
Explanation:
a) Data and Calculations:
Initial costs:
Lot purchase prices:
Front lot, $400,000/acre x 2 = $800,000
Back lot $100,000/acre x 2 = 200,000
Legal fees, applications, permits, etc. 80,000
Site clearing & preparation: $3000/acre 12,000 ($3,000 * 4)
Paving roadways, parking, curbs, and sidewalks:
25% of total lot at $40,000/acre. 160,000
Construction costs:
$3,000,000 per building 192,000,000
Total initial costs $193,252,000
Annual costs:
Taxes and insurance: $5000/month per building $3,840,000
Landscaping: 25% of lot at S1000/acre/month 48,000
Security: $1000 building for $1500/month 1,152,000
Other costs: $2000/month 24,000
Total annual costs $5,064,000
Revenue (assume 90% annual occupancy)
Front lot units:
$2500/unit/month (32 * 4 * 2,500 * 90% * 12) = $3,456,000
Rear lot units:
$1750/unit/month (32 * 4* 1,750 * 90% * 12) = 2,419,200
Other revenue: $5000/month ($5,000 * 12) = 60,000
Total annual revenue = $5,935,200
