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Assume you are Claire and are trying to determine if the Mount Hope shopping mall is a good investment of your $6.5 million inheritance, using a 20-year period. Assume operation of the facility begins in year 2 and the equity is utilized in year 1. Determine the: Gross annual revenue Annual Maintenance Costs Net Annual Revenue Estimated Annual Debt Service Estimated Annual Profit Net Present Value of Claire’s investment, if the discount rate = 9% Internal Rate of Return for the project investment Prepare a memo summarizing your findings from above and make a firm recommendation as to whether the project is a sound investment.
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CEIE-370 CONSTRUCTION SYSTEMS
SPRING 2019
ASSIGNMENT 3
THE MOUNT HOPE PROJECT
CHAPTER 3: DEVELOPING AN ECONOMIC ANALYSIS
DUE DATE: WEDNESDAY APRIL 17TH, 1:30 PM
CEIE-370 Construction Systems
Spring 2019
Assignment 3
CEIE-370 CONSTRUCTION SYSTEMS
Assignment 3 – The Mount Hope Project
DEVELOPING AN ECONOMIC ANALYSIS
Setting:
After some time the owner, the architect, and the engineer met again. Claire was very pleased
because Tony’s design exceeded her expectations. During this meeting Angie told Claire that it was time
for Claire get in contact with a contractor in order to get a good estimate of project costs before talking with
the banks. Claire appreciated the design engineer’s advice, because without additional funding there would
be no mall. Angie recommended that Claire talk to Cornelius “Corny” Cornell, the owner of Corny
Construction & Co., with whom she had good experiences.
Claire gave Corny a call and they set an appointment for the next day at Corny’s office, where their
conversation went like this:
Corny: Nice to see you. I hear you have a property you want to develop. What can I do for you?
Claire: I hope you can help me with some cost estimates, because soon I have to go to the bank to get
funding for the project. I brought you the preliminary drawings from my architect and engineer. What do you
think the project will cost?
Corny: Let’s have a look. That is a well-designed mall. Well, Corny Construction has done some malls
before; we will be able to provide you with an estimate. However, first I need to check out the property and
what is needed from the site work, utilities, and landscaping points of view. I see you have some estimates
on the site development. Whom did you get those from?
Claire: The numbers are from “Big Builders.” Corny: Oh, good. I know Bob. I’ll give him a call. In addition, I
will talk to your architect and your engineer. I’ll be done with the estimate in two days, okay?
Claire: Great. Which bank do you do business with?
Corny: I work with Betsy Benefit from “Best Banking.” She is very reasonable when it comes to lending
money.
Two days later Claire was back in the office of Corny Construction. While she was waiting for Corny
in his office-room, she took a look at his bookshelf. There were some interesting book titles, such as
Construction Scheduling, Estimating, Means and Methods, Contract Administration, and Financing
Construction Projects. “This is an interesting subject,” she thought. Her thoughts were disturbed when
Corny walked in and gave her the list of estimates (see Table 3.1).
Based on the information Corny had provided, Claire realized that she would need a loan of
$25,330,000 to complete construction of the project, after the use of the $6.5 million inheritance. She
estimated the interest on the loan would be 7.5 percent, compounded annually over a 20-year period. Claire
also estimated that she could expect $30 per square foot of rental space (150,000 SF) and that her
maintenance and operating costs would be approximately 2 percent of total cost of the project. She began
to wonder exactly how much profit (if any) she could expect to make from the project while she was paying
off such a substantial loan over the next twenty years. It would be necessary to convey this to the bank to
receive funding. After she returned to her office, Claire set about developing a profit picture for the Mount
Hope shopping facility to determine if the project was economically feasible.
CEIE-370 Construction Systems
Spring 2019
Page 2 of 3
CEIE-370 Construction Systems
Spring 2019
Assignment 3
Table 3.1: Parameter Estimate of Costs for the Mount Hope Market
Item
Description
Estimated Cost $
1
Land
2,945,000
2
Bob Builder consulting fee
50,000
3
Corny Cornell consulting fee
34,000
4
Architect fee
5
Permitting cost
6
Design & consulting engineer fee
7
Grading and site work sub
8
Construction of shopping facility
9
Construction of parking lot
2,027,000
10
Installation of utilities by sub
1,435,000
11
Installation of electrical reticulation by sub
248,000
12
Landscaping sub
304,000
13
Allowance for fees of loans and interests
105,000
25,000
Total
165,000
2,487,000
17,573,000
4,436,000
31,834,000
Assignment 3
Assume you are Claire and are trying to determine if the Mount Hope shopping mall is a good investment
of your $6.5 million inheritance, using a 20-year period. Assume operation of the facility begins in year 2
and the equity is utilized in year 1.
Determine the:







Gross annual revenue
Annual Maintenance Costs
Net Annual Revenue
Estimated Annual Debt Service
Estimated Annual Profit
Net Present Value of Claire’s investment, if the discount rate = 9%
Internal Rate of Return for the project investment
Prepare a memo summarizing your findings from above and make a firm recommendation as to whether
the project is a sound investment.
CEIE-370 Construction Systems
Spring 2019
Page 3 of 3

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