Entertainment Showland, one of the leading entertainment center chains in North
America, decided to establish a comprehensive entertainment center in Istanbul due to its
international and metropolitan character. When the cost structure of the company is
analyzed, it is seen that the highest cost item consists of rent expenses. Therefore, the
construction investment will be made by the company. They contacted with Cesur İnşaat
Müşavirliği A.Ş. and requested a detailed report to clarify their investment decisions in Turkey.
As a result of the joint work with the entrepreneur firm, Cesur İnşaat Müşavirliği A.Ş. has
provided an analysis that will form the basis of the feasibility report for two alternative
projects.
• First alternative: To construct the building system as reinforced concrete.
• Second alternative: To construct the building system as steel construction.
1st alternative
• Expected lifetime : 30 years,
• Construction cost : (127+Y) million TL,
• Land development cost : (30+Y) million TL,
• Salvage value (at the end of the lifetime) : (34.5+X) million TL,
• Maintenance cost : 8 million TL at the end of the 8th year, 12 million TL at the end of
the 14th year, 6 million TL per year starting from the end of the 18th year,
• HVAC and fuel expenses : 4.X million TL per year,
• Operating expenses : 11.X million TL per year,
• Revenue : (45+X) million TL per year,
2nd alternative
• Expected lifetime : 40 years,
• Construction cost : (158+Y) million TL,
• Land development cost : (34+Y) million TL,
• Salvage value (at the end of the lifetime) : (60+X) million TL,
• Maintenance cost : 3.3 million TL per year,
• HVAC and fuel expenses : 7.Y million TL per year,
• Operating expenses : 12.X million TL per year,
• Revenue : (52+X) million TL per year,
As a result of the negotiations with Cesur İnşaat Müşavirliği A.Ş., construction of both
alternatives will be completed and operation will start at the end of the 1st year (incomes
and expenses will occur at the end of the 2nd year). A company named "International
Entertainment and Show Center" has been established in Turkey for the investment. It is
determined that the required investment can be made with a loan. The interest rate is the
annual effective interest rate calculated in the previous question (in Question 1). For such
investments, the applicable tax rate is 35% and straight line depreciation will be applied in
the valuation of the investment.
For the investment that preliminary studies have been completed;
1) Prepare the tables that show income and expenditure budgets of each year separately for
both steel and reinforced concrete construction alternatives.
2) Draw cash flow diagrams for each alternative.
3) Decide the feasibility of this investment within the scope of you have seen the course,
Compare alternatives by calculating;
• Present Worth (PW) analysis (by using least common multiple (LCM) method),
• Annual Worth (AW) analysis,
• Rate of Return (ROR) analysis.
Discuss the findings obtained as a result of the application of each method separately in terms
of investment decision.
4) In the light of the findings obtained by applying all methods, which alternative should be
chosen? Or should the doing nothing alternative be chosen? All methods must be taken into
account to make this decision. Please explain in detail.