Question
A shopping mall has a parking structure under construction and wishes to know if building two additional parking levels now (option A) will be a
A shopping mall has a parking structure under construction and wishes to know if building two additional parking levels now (option A) will be a better investment than waiting six years to add them when they will be needed (option B). Adding them now just means paying the on-site contractor an additional $1 million per level for labor and materials. However, operating costs of $25,000 per level each year need to be paid even if the levels remains vacant. Waiting six years means paying a contractor to bring in all their equipment back to the site including expensive cranes which will cost $1 million. In addition, the labor and materials for each floor will likely be $1.5 million due to inflation in the construction industry. Draw the two cash flow diagrams and compare the options (i.e., NPW computation). Ignore the costs of the other levels. Ignore incremental IRR. Which option would you recommend if the MARR is 12%? Why?
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