Assume your job is to determine what would be the highest and best use of a land. Your studies narrowed the options to two, a parking place or a gas station. It is cheaper to construct a parking place, $19,000 in the first year. Operational costs, maintenance and other expenses would add up to $1,000 a year. Thus, in the first year, total cost would be $20,000 and, in the following years, $1,000 a year. A parking place is expected to generate $10,000 a year.

 It is more expensive to construct a gas station, $98,000 in the first year. It is also more expensive to operate it. All other operational costs, maintenance and other expenses would add up to $2,000 a year. Thus, in the first year, total cost would be $100,000 and, in the following years, $2,000 a year. On the other hand, a gas station is expected to generate a higher revenue, $15,000 a year.

 

Both projects are supposed to last 20 years. A template of revenue and costs is presented below. The rate of return (discount) is 5%. 

1. The present value of the cost flow of the Parking Lot is:

2. The expected present value of the revenue flows of the Parking Lot is:

3. . The expected present value of the flows of the Residual to Land of the Parking Lot option is:

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Parking lot Gas Station Revenue flow Cost flow Revenue flow Cost flow Year 0 Year 0 Year 1 10,000.00 20,000.00 Year 1 15,000.00 100,000.00 Year 2 Year 20 10,000.00 10,000.00 10,000.00 1,000.00 1,000.00 1,000.00 Year 2 (...) Year 20 15,000.00 15,000.00 15,000.00 2,000.00 2,000.00 2,000.00 Parking lot Gas Station Revenue flow Cost flow Revenue flow Cost flow Year 0 Year 0 Year 1 10,000.00 20,000.00 Year 1 15,000.00 100,000.00 Year 2 Year 20 10,000.00 10,000.00 10,000.00 1,000.00 1,000.00 1,000.00 Year 2 (...) Year 20 15,000.00 15,000.00 15,000.00 2,000.00 2,000.00 2,000.00