Use the Following Information to Answer the Subsequent Questions

question 14

Multiple Choice

Use the following information to answer the subsequent questions. At site "A" the best current construction project is a retail plaza that would cost $3,000,000 to build exclusive of land cost) and would then generate net rents of $400,000/yr, expected to grow at 2% per year indefinitely. At site "B" the best current construction project is an office building that would generate net rents of $500,000 per year, expected to remain constant. Construction of the office building would cost $4,000,000 exclusive of land cost) . Suppose investors require a cap rate current net income as percent of investment) equal to 10% minus the expected annual growth rate in the net income.
-Suppose the current market value of both undeveloped sites is $1,500,000 each. On which site or sites is it currently profitable to develop?

• A) Site A.
• B) Site B.
• C) Both sites A and B.
• D) Neither site A nor B.

---

Definitions:

Profit Margin

The percentage of revenue that remains after all operating expenses, taxes, and costs have been deducted from total sales.

Net Income

The final amount a company keeps as profit after deducting all costs and taxes from its gross revenue.

Marginal Tax Rate

The rate of tax imposed on your income, corresponding to each applicable tax bracket.

Average Tax Rate

Total taxes paid divided by total taxable income.