Assignment
A financier has a staff of three people whose job it is to examine possible business ventures for him. Periodically they present their findings concerning business opportunities. On a particular occasion, they presented the following investment opportunities:
Project A: This is a project for the use of commercial land the financier already owns. There are three mutually exclusive alternatives:
A1: Sell the land for $500,000.
A2: Lease the property for a car-washing business. An annual income, after all costs (property taxes, etc.) of $98,700 would be received at the end of each year for 20 years. At the end of the 20 years, it is believed that the property could be sold for $750,000.
A3: Construct an office building on the land. The building would cost $4.5 million to construct and will not produce any net income for the first 2 years. The probabilities of various levels of rental income, after all expenses, for the subsequent 18 years are as follows:
|
Annual Rental Income
|
Probability
|
|
$1,000,000
|
0.1
|
|
$1,100,000
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0.3
|
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$1,200,000
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0.4
|
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$1,900,000
|
0.2
|
The property (building and land) probably can be sold for $3 million at the end of 20 years.
Project B: An insurance company is seeking to borrow money for 90 days at 13.75% per annum, compounded continuously.
Project C: A financier owns a manufacturing company. The firm desires additional working capital to allow it to increase its inventories of raw materials and finished products. An investment of $2 million will allow the company to obtain sales that in the past the company had to forgo. The additional capital will increase company profits by $500,000 a year. The financier can recover this additional investment by ordering the company to reduce its inventories and to return the $2 million. For planning purposes, assume the additional investment will be returned at the end of 10 years.
Project D: The owners of Sunrise magazine are seeking a loan of $500,000 for 10 years at a 16% interest rate.
Project E: The Galveston Bank has indicated a willingness to accept a deposit of any sum of money over $100,000 for any desired duration at a 14.06% interest rate, compounded monthly. It seems likely that this interest rate will be available from Galveston, or some other bank for the next several years.
Project F: A car rental firm is seeking a loan of $2 million to expand its fleet. The firm offers to repay the loan by paying $1 million at the end of Year 1, and $1,604,800 at the end of Year 2.
Question:
If there is $4 million available for investment now (or $4.5 million if the Project A land is sold), which projects should be selected? What is the MARR in this situation?