Question

SkyBlue Co. is a Chicago-based company that provides self-storage rental service. The management team of SkyBlue has been discussing whether to build a new storage facility on the west side of the city. At the management meeting, Miller Brown, the chief financial officer, presented the following information: “Six years ago, we acquired the necessary land at a cost of $475,000, and spent $90,000 to demolish worthless buildings on the land. Since then, we have rented the land to Chicago Convention Center, which is located nearby, as a temporary parking lot. We have received an 4 annual revenue of $6,000 on average for this use of the land. According to the forecasts made by my team, the proposed storage facility can provide 270 storage units in total, of which 50 are large-size, 120 are mid-size, and 100 are small-size). The storage units can be rented on a monthly or daily basis. The monthly rate for large-size, mid-size, and small-size storage units is expected to be set at $75, $50, and $40, respectively. And the daily rate for large-size, mid-size, and small-size storage units is expected to be set at $4, $2.4, and $2, respectively. The number of large-size, mid-size, and small-size units rented at the monthly rate is estimated to be 30, 70, and 60, respectively. The average number of clients paying the daily rate would be 10, 30, and 25, respectively (for each of the 30 days per month, assuming that the storage facility would operate 30 days per month). There would be one-time construction cost of the storage facility, $32,000. Fixed costs to operate the storage facility per month would be $5,000. The monthly variable cost of servicing each monthly client would be $8. The estimated cost per daily client would be $1.6.” Required: Given the information provided, would you recommend building this storage facility? Explain why (please be sure to discuss costs that relevant or irrelevant to this decision and why there are relevant or irrelevant, show your numerical analysis, and limit your answer to 500 words or less)

Answer 1

Solution as per below image: