A real-estate developer seeks to determine the most economical height for a new office building, which will be sold after five years. The relevant net annual revenues and salvage values on after-tax basis are as given in Table PI2.4.
Table PI2.4

(a) The developer is uncertain about the interest rate (i) to use, but is certain that it is in the range from 5 to 30%. For each building height, find the range of values of i for which that building height is the most economical.
(b) Suppose that the developer's interest rate is known to be 15%. What would be the cost (in terms of net present value) of a 10% overestimation of the resale value? (In other words, the true value was 10% lower than that of the original estimate.)

Height 2 Floors 3 Floors 4 Floors 5 Floors $500,000 $750,000 $1.250,000 $2,000,000 First cost Lease revenue Net resale value 600,000 900.000 2,000,000 3,000,000 199,100 169,200 149,200 378.150