An international co-working office company WeWork is considering setting up a co-working office.
The cost of building a 100-office room (excluding furnishing) is $10 million. The firm uses a 12-year
planning horizon to evaluate investment of this type. The furnishing for this co-working office must be
replaced/renewed every four years at an estimated cost of $3,300,000 (at k = 0, 4, 8). The old furnishings
have no market value. Annual operating and maintenance expenses for the facility are estimated to be
$250,000. The market value of the motel after 12 years is estimated to be 25% of the original building
cost. [20 points]
Offices at the co-working space are projected to be rented at an average rate of $3,000 per month. On
average, the office will rent 80% of its rooms each month. Assume the office will be open all year.
MARR is 10% per year.
(a) Using an annual-worth measure of merit, is the project economically attractive?
(b) Investigate sensitivity to decision reversal for the following three factors: (1) capital investment, (2)
MARR, and (3) occupancy rate (average percent of office rented per month). To which of these factors
is the decision most sensitive?
Hint: (1) The revenue from renting is (100 rooms)(0.8)($3,000 per room-month)(12) per year, you don’t
need to consider the monthly compounded interest. (2) To analyze the sensitivity of MARR, find IRR
by EXCEL first, and then calculate the % change.