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.

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Definitions:

Debit

A bookkeeping record that leads to an uptick in a firm's assets or a reduction in its liabilities on the balance sheet.

Account Receivable

Money owed to a company by its customers for goods or services delivered but not yet paid for.

Total Assets

The sum of all current and non-current assets owned by a business, representing its value and operational capacity.

Increase

Increase signifies a rise in value or quantity of a variable or account in the context of finance and accounting.