Question

The required investment cost of a​ new, large shopping center is ​$50 million. The salvage value of the project is estimated to be ​$15 million​ (the value of the​ land). The​ project's life is 19 years and the annual operating expenses are estimated to be ​$14 million. The MARR for such projects is 12​% per year. What must the minimum annual revenue be to make the shopping center a worthwhile​ venture?

Answer 1

Answer:

The minimum annual revenue be to make the shopping center a worthwhile​ venture is $20.55 million.

Explanation:

The required investment cost of a​ new, large shopping center is ​$50 million.

The salvage value of the project is estimated to be ​$15 million​.

The​ project's life is 19 years and the annual operating expenses are estimated to be ​$14 million.

The MARR for such projects is 12​% per year.

Suppose the minimum annual revenue is x.

We will use the compound interest table to find the value of cash flows.

Present value of cash inflows = Present value of cash outflows

$x\ (PVAF,12 \%,19)\ +\ 15\ (PVF,12 \%,19)\ =\ 50\ \times\ 1\ +\ 14\ (PVAF,12 \%,19)$

$x\ \times\ 7.366\ +\ 15\ \times\ 0.1161\ =\ 50\ +\ 14\ \times\ 7.366$

7.366x + 1.7415 = 50 + 103.124

7.366x = 151.3825

$x\ =\ \frac{151.3825}{7.366}$

x = $20.55

Minimum annual revenue = $20.55