PT Rumahku Istanaku is a real estate firm located in Denpasar. The firm has an expansion plan to build a new futuristic mall in Denpasar targeting high-end markets. Mrs. Diana is the firms head of accounting and finance and presents the relevant information to the executives of PT Rumahku Istanaku.

She notes that the firm shall purchase immediately for the land where the mall is going to be built. The land costs Rp 100.000.000.000,-. For the building costs, she estimates that 25 percent will incur immediately, another 45 percent will incur next year, and the remaining will incur in the next two years.

The mall cannot be operated until the building is complete. Therefore, she expects that the mall will be able to operate starting from the third year. She also documents that the building is depreciable for the next 10 years by the straight-line method. Her team also informs that the mall operating expenses (excluding depreciation) are expected to be steady at around 10 percent of revenues.

Her team further explains that the firm shall also invest Rp 10.000.000.000,- additional working capital and expect to recover Rp 6.000.000.000,- when the mall is closed (later on, as presented by the firms business manager). Her team also informs that the PT Rumahku Istanakus marginal tax rate is 27 percent, and the appropriate nominal discount rate is 11 percent. Recent annual inflation in Bali province is 9 percent.

Mr. Rudi, the firms head of business manager, also attends the meeting and presents additional information to the executives. His team forecasts that the firm can expect to lease to 150 tenants with an average rental fee Rp 400.000.000,-. His team also reasonably expects that the firm can charge an annual increment rental fees of 10 percent per annum with an annual 5 percent increment additional tenant every year. His team points out that the mall shall be closed after five years of operation because its competitive edge will be fade away.

1. Evaluate whether PT Rumahku Istanaku shall expand the futuristic mall! Your analysis must refer to capital budgeting techniques. Please write reasonable assumptions and reasons in your calculations.

2. After hearing the responses in part a), an executive informs that the land can be re-resold when the mall is closed later on. The executive also mentions that the firm can reasonably expect a 5 percent annual incremental land price, 1 percent selling costs, and marginal tax rate applied only to the gain portion of selling the land. Explain how this information might update your analysis in part a)!