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 investment. The building would cost $100 per square foot to build:

Required:

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

b. If rents are suddenly expected to grow at 4 percent indefinitely, what would the property value and land value be now? What percentage change in land value would this be relative to the land value in (a)?

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)?

d. Suppose that the land owner is asking $12,000,000 for the land. Under assumptions in part (a) would this project be feasible?

e. If the land must be acquired for $12,000,000, returning to the assumptions in (a), how much of a change in the following would have to occur to make the project feasible? (Consider each item one at a time and hold all other variables constant.)

(1) Expected return on investment (r).

(2) Expected growth (g) in cash flows.

(3) Building cost.

(4) Rents.