Garcia Developers Will Erect a Small Office Building at a Cost

question 25

Multiple Choice

Garcia Developers will erect a small office building at a cost of $4,500,000. They have a client who will lease the space for 5 years at a price that will produce free cash flows of $150,000 per year. For approximately how much would they need to sell the building for at the end of the 5th year to reach break-even NPV? Garcia uses a discount rate of 10% for projects of this type.

• A) $3,750,000
• B) $5,755,936
• C) $6,331,530
• D) $6,964,683

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Definitions:

Monopolistically Competitive

A market structure characterized by many firms producing similar, but not identical, products and where there are few barriers to entry or exit.

Raises Prices

Refers to the action or factor that causes the price of goods or services to increase.

Profit-Maximizing

A strategy or objective of firms to adjust their production and pricing to achieve the highest possible profit.

Long-Run Demand Curve

Illustrates how the quantity of a good demanded changes over time as all economic factors, including production technologies and preferences, can adjust.