Dazzle Builders is considering an opportunity to set up a block of flats close to its corporate office. It is evaluating the following two options:
Option 1: Buy a plot, construct a block of flats on the plot and rent it.
Option 2: Buy a well-structured block of flats, make some modifications to restructure the block of flats and rent it.
The property evaluator of the company is asked to evaluate the proposals and propose a feasible plan. The information regarding the first option is given below:
• The initial investment required is £680,000.
• At the end of eight years, the block of flats will have a salvage value of £120,000.
• As the block of flats will be newly constructed, the company can induce a higher rental revenue as opposed to the revenue generated from an already constructed block of flats. The annual rental revenue from this investment is expected to be £600,000.
• After four years, the company will incur additional costs of £80,000 towards lift replacement and miscellaneous repairs. Dazzle Builders has planned to purchase the well-structured block of flats from its subsidiary. This block of flats was constructed a year ago and has not been used to date. Dazzle Builders has plans to restructure the flats before renting them out. The information regarding this well-structured block of flats is given below:
• The initial investment required is £380,000.
• At the end of eight years, the block of flats will have a salvage value of £80,000.
• The annual rental revenue the company can generate by refurbishing flats is relatively low as opposed to the rental revenue it can generate by constructing a new block of flats. The annual rental revenue is £500,000.
• After four years, the company will have to incur additional costs of £100,000 towards lift replacement and miscellaneous repairs. Dazzle Builders will outsource the annual maintenance of the flats under both options. The annual cost of the maintenance contract is £250,000.
The company requires a minimum return of 14% on all investment projects. This rate is used as a discount rate in the discounting process.

Required
1. Determine the net present value for both the options using the total-cost approach. Based on the net present values, identify which investment option is more feasible for the company.
2. Determine the net present value of both the investment options using the incremental-cost approach.
3. Instead of renting out the block of flats, Dazzle Builders is considering giving it to its employees. By doing so, the management hopes that employees will stay close to the office. The management is planning to give these flats to its employees free of cost. The company has two investment options:
Option 1: Buy a plot, construct a block of flats on the plot and give it to its employees.
Option 2: Buy a well-structured block of flats, make some modifications to restructure the block of flats and give it to its employees. In this situation, revenues are not directly considered for decision making. Hence, the most desirable alternative will be the one that promises the least total cost from the present value perspective. Analyse both options using the total-cost approach (least-cost decision) and the incremental-cost approach (least-cost decision).
4. The property evaluator has suggested a third investment opportunity, in which the company should buy a well-structured block of flats from an external vendor rather than buying it from its subsidiary. Compare both the approaches used to evaluate the competing investment projects. As a project evaluator, which approach would you suggest for the company to compare the three competing investment options?