Evaluating Projects with Risk
A downtown business is considering purchasing and operating a parking garage for its
employees. The garage has 500 spaces. There are currently 250 employees; however, the
number of employees is growing at the rate of 50 employees per year.
Assume 250 in
first year, 300 in second, and so on. The garage will be sold after five years.
The purchase cost of a parking garage with 500 spaces is $3,400,000.
for the garage will be paid immediately.
The company is currently paying for employee parking in a different garage at a
cost of $3000 a year per employee. When the garage is purchased the employees
will use the new garage. This represents a savings to the company.
Any garage spaces not used by employees will be rented to other persons working
downtown at a rate of $1000 per year.
Annual operating cost for the garage is $150,000 in the first year, but it will
increase by 5% in each subsequent year.
(i.e. the cost in each year is 5% greater
than in the previous year.)
The company must provide $200,000 in working capital. Working capital is
contributed at the beginning of the project, but it is returned at the end.
After five years the garage will be sold for $1,500,000.
The expression for the net present worth (in $1000) for the project is:
NPW = -3400 + 250*3(P/A,
, 5) + 50*3(P/G,
, 5) + 250*1(P/A,
, 5) - 50*1(P/G,
, 0.05,5) – 200 + 200(P/F,
, 5) + 1500(P/F,
Construct a deterministic model for this situation using the
. Use a
geometric gradient series for the term involving operating cost. The company’s MARR is