Aspen Valley Storage has 1,800 units. Each unit is 100 square feet and rents for $100 a month. The firm is considering installing climate-control in 550 of the units, so that those units can be
Used to store items that would be damaged by excessive heat or cold, such as art work. The
Installation is expected to cost $500,000, and Aspen Valley's utility bill is expected to increase
By $3,750 if the conversion takes place. The climate-controlled units are expected to rent for
$130 a month. If the appropriate discount rate is 15%, what is the NPV of the project? Assume
All cash flows are perpetuities. (Note: Be careful to note whether the cash flow is monthly or
Annually when you work this one.)
A)+$4.92 million
B)+$1.02 million
C)+$0.52 million
D)-$0.48 million

Question

Quizplus · Accepted Answer

The NPV of the project can be calculated by first determining the additional annual cash flow from the climate-controlled units and then using the NPV formula for perpetuities. The additional monthly rent from the climate-controlled units is $30 per unit (from $100 to $130), so for 550 units, this is an increase of $16,500 per month or $198,000 annually. The annual increase in utility bills is $3,750, so the net additional annual cash flow is $198,000 - $3,750 = $194,250. The NPV is calculated as the net additional annual cash flow divided by the discount rate minus the initial investment. Using a 15% discount rate, NPV = $194,250 / 0.15 - $500,000 = $1,295,000 - $500,000 = $795,000 or approximately $0.8 million, which is not an option provided. However, the closest provided option to the correct calculation is +$0.52 million, indicating a possible mistake in the calculation or interpretation of the options. The correct approach involves calculating the perpetuity value of the additional cash flow and subtracting the initial investment, but none of the options exactly match the expected result based on the given numbers and method.

Aspen Valley Storage Has 1,800 Units