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 $$25$ 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 $$130$ 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 $$12,500,000$ for the land. Under assumptions in part $($a$)$ would this project be feasible?

e$.$ If the land must be acquired for $$12,500,000,$ 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.

Complete this question by entering your answers in the tabs below.

Required A

Required C

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

Property value

Land value