Is this good investment project

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Reference no: EM131826487

An acre (43,560 SF) of land in the CBD is being used as an open parking lot. The land currently brings $28/SF/year rent, paid in arrears, and the rent is expected to increase by 2% annually. The discount rate for the parking lot rents is 8%. An investment project that is being considered is building a 100,000 SF office building on the land. The construction will cost $2,000,000 and the building will have a 30 year productive life after it is built (after 30 years, it is assumed that the building can be demolished and the land can be converted to a parking lot without additional cost). The construction will take one year2 . The resulting office space is expected to be rented for net $22/SF/year (in arrears) starting next year, and the rent is expected to increase by 1% annually. The required rate of return on office buildings is 11%. Is this a good investment project?

Reference no: EM131826487

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