Ajax Investment Company is considering the purchase of land that could be developed into a Class A office project. At the present time, Ajax believes that the site could support a 300,000 rentable square foot project with average rents of $20 per square foot and operating expenses equal to 40 percent of that amount. It also expects rents to grow at 3 percent indefinitely and believes that Ajax should earn a 12 percent return (r) on investments. The building would cost $100 per square foot to build:

a. What would the estimated property value and land value be under the above assumption?

b. If rents are suddenly expected to grow at 4 percent indefinitely, what would the property value and land value be?

c. Instead of "b", suppose that rents will grow by only 1 percent because of excessive supply. What would land value be now? What percentage change would this be relative to the land value in "a"?