Math in the Workplace: Overview

Math in the Workplace - Numbers & Operations

Problem:

The Eagle Land Company has the opportunity to purchase 76.80 acres of land in Boise, near the Cole/I-84 Interchange, for $20,000 an acre. The property is zoned for light industrial and retail use.

Developed property of this sort is currently selling for $3.50 a square foot. As configured, it appears that 415,000 square feet of the land will need to be dedicated as non-sellable roadways, sidewalks and median strips.

Engineering fees and improvements (including sewer lines, telephone, electrical power, curbs and gutters) will cost the company an additional $1,250,000.00.

To receive an adequate profit after salaries, interest charges, realtors' fees and other fixed costs, the Eagle Land Company must receive a mark up of at least 150% above the dollar amount of its purchase and development costs (250% of the total cost of the development.)

Commercial lots are generally sold on a square footage basis.

1. What is the minimum price Eagle Land Company must receive, on a square footage basis, for the land in this subdivision? (Hint: An acre contains 43,560 square feet.)

2. Does it make economic sense for Eagle Land Company to purchase this property? Support your conclusion.

Solution:

1. What is the minimum price Eagle Land Company must receive, on a square footage basis, for the land in this subdivision?

Cost of land:

76.80 acres x $20,000/acre = $1,536,000

Total cost to develop the subdivision equals cost of land plus cost of engineering and improvements:

$1,536,000 + $1,250,000 = $2,786,000

The total minimum price equals total cost to develop the subdivision times 250%:

$2,786,000 x 2.50 = $6,965,000

Total square footage in the development equals total acres times square footage per acre:

76.80 acres x 43,560 sq ft/acre = 3,345,408 square feet

Total sellable square footage equals total square footage in the development less square footage to be dedicated as roadways, sidewalks and median strips:

3,345,408 sq ft - 415,000 sq ft = 2,930,408 sq ft

The minimum sales price per square foot equals the total minimum sales price for the subdivision divided by the sellable square footage in the development:

$6,965,000.00 2,930,408 sq ft = $2.3768021 or $2.38

2. Does it make economic sense for Eagle Land Company to purchase this property?

Yes, this land can be sold for $3.50 per square foot and $2.38 per square foot will insure an adequate profit. If the land is sold for $3.50 per square foot, the Eagle Land Company would receive an additional profit of $1.12 per square foot above the amount it deems to be an adequate profit.

At 2,930,408 square feet of sellable land in the entire development, the additional $1.12 per square foot would result in an extra $3,282,056.90 in profit on property that cost $2,786,000 to develop.

Math in the Workplace: Overview