The City of Grant has been contacted by a downtown bank about its desire to purchase land from the city. The land is adjacent to the bank, and the bank intends to use the property for a parking lot and for expansion. The city is interested in working with the bank, because it wants to keep the bank located downtown. If the bank fails to obtain the adjacent property, it may have to close its downtown facility. Retention and perhaps expansion of the downtown bank is expected to enhance the overall health of the downtown business district and will increase the city's proceeds from property and sales taxes.
The appraised value of the city's property is $100,000 plus the loss of use of a water well and storage tank located on the property. The replacement cost of the storage tank is estimated to be $250,000. Loss of the water well means that water must be purchased from the neighboring City of Darnett in addition to what is already being purchased from that city.
The annual cost of producing from the existing well is $32,700 for electricity and $2,500 for labor service. The cost of pump repair and maintenance is estimated to be $20,000 per year for the years 20E through 20H. The annual cost of replacing this lost water supply by additional purchases from the City of Darnett is a fixed demand charge of $46,870 plus a charge of $.2585 per 1,000 gallons for the additional 100,000,000 gallons to be supplied. All costs except pump repair and maintenance are expected to increase at an annual rate of 8%. The City of Grant's cost of capital is estimated to be 10%, and it is estimated that the well has a remaining life of 8 years.
Required:
Compute an estimated land value that includes the present value of the differential cost of water and identify other considerations that might affect the final price quoted to the bank.