Economic Analysis Project

CE 332 section 001

Group 18 Members:
Robert Pflugh
Nate Wadley
Ziyun Zhu
Mark Bachman
Brandon Billy

Table of Contents:

Table of contents

Project Executive Summary

Project Description

Assumptions/ Decision Points - Income and Expenses

Risks

10

Discussion of Financing

11

Cash Flow Diagram and Computations

13

Summary of Project

16

References

17

Project Minutes and Attendance

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Project Executive Summary:

This project is aimed to examine the construction of a warehouse. Given two scenarios, one
where the entire warehouse is constructed in three years, a second where the warehouse is
constructed in two phases five years apart, in both scenarios the warehouse is rented or leased.
With this knowledge the financial validity of each scenario was considered with different
variables like leasing rates, insurance costs, maintenance costs, borrowed money, etc. The base
point for comparison is the calculated value of the Effective Uniform Annual Cost (EUAC).
Using information from the internet and other professionals, reasonable estimates on
variable likes loan interest rates, insurance costs, and lease rate per square foot were defined.
After which a cash flow diagram is constructed as visual tool for calculating the EUAC. Then
using an interest rate of 6% and the corresponding interest factors, the EUACs below were
calculated:

Scenario 1: 2.55 Million

Scenario 2: 1.2 Million

Based on a simple comparison of these two numbers it is evident that Scenario 2 is the

better of the two options. Over the course of a 20-year economic life Scenario 1 costs over two
times as much each year as Scenario 2. Through the course of this report the two scenarios will
be explained in more detail and better show how this conclusion was reached.

Project Description:
The objective of the project is to analyze and compare two different ways of constructing,
renting, and leasing a 600,000 square foot warehouse over 20 years. Scenario 1 describes
building the entire warehouse at once and leasing half of it for 5 years after construction is
complete. With an additional 2,500 square feet of office space for the side to be leased. Scenario
2 describes building half the warehouse up front, then building the remaining half 5 years later.
The comparison focuses on the economic success of each scenario, which defined by which
scenario is either more profitable or costs less. This is done by calculating the EUAC (Effective
Uniform Annual Cost) for each, which takes into account the profits, costs, and financing every
year for the first 20 years of ownership. The costs used for the EUAC were found by researching
similar completed warehouses, and assuming various expenses based off what they needed to
operate. Lastly by directly comparing the EUAC of each scenario an accurate conclusion can be
made to which scenario has better economic success.
To calculate the EUAC for scenario 1 various steps and calculations had to be made. To
start out with the given costs included the site work; building construction, retrofit/repair for the
additional office space for the leased side, pavement maintenance and also the civil and
architectural engineering design fees. In addition to these costs various assumptions and research
had to be done to determine the costs of maintaining and operating the facility over the 20 years.
Additionally a way of financing had to be determined since the owner would only be providing
the first 20% of the costs. This scenario was unique from the next in that the entire warehouse
would be able to make more money for the first five years from leasing half of the space.
Another difference is that the leased side would also have 2500 square feet of additional office

space. Both the benefits and costs of this aspect were used when calculating the EUAC for this
scenario.
The calculation of the EUAC of scenario 2 was very similar to the calculation of the
EUAC for scenario 1. For example the costs given included site work (phase 1 and 2), building
construction (phase 1 and 2), the civil and A/E design fees, pavement resurfacing and also the
A/E 5-year building code evaluation. Although the costs were different we assumed the same
rates for financing the facility. Also similar rates were used for the addition of the maintenance
costs. The main difference of this scenario would be that the construction of the building would
be split up into two phases. The first half of the building is built right away during the first phase,
with the second half being built during phase 2 five years later. The costs and benefits of this are
evaluated and added into the EUAC for comparison to the first scenario.

Assumptions/ Decisions Points - Income and Expenses:

Assumptions/ Decision Points:
The nature of this project requires many assumptions to be made about details that cannot
be otherwise justified. Many were given as part of the project parameters, and then more were
added as the analysis continued. The basic assumptions include:

Construction of office space would be included in general construction.

All costs outside of initial construction are to be covered by rental/lease income.

The owner is not responsible for any fuel and maintenance for trucks and forklifts, as
well as staff costs for operating the equipment and janitorial duties.

For the sake of a reasonable analysis, nothing is assumed to go wrong in terms of natural
disasters, arson, terrorist attacks, etc. (but insurance is still assumed to be needed as the
owner would realistically insure his own investment).
o Insurance during the construction is covered by the general construction cost.
o Insurance of items in-transit is the responsibility of the renter.
o Assume average snowfall, rainfall, and other environmental factors that do not

highly impact costs.

Also assume that the designer is competent enough to address issues such
as storm water management.

Besides the assumptions made as the basis of the project itself, there are some other assumptions
made that seemed appropriate to the scope of the cost analysis. These include:

Instead of having an in-house handyman/maintenance, a yearly budget is made for

maintenance repairs (roofing, plumbing, electrical, etc.).

Major financial decisions are made at the discretion of the Owner, meaning there is no
need to consider accountants, lawyers, etc. as part of the warehouse costs (and if the
owner decides he needs the services of anything outside our scope of analysis, he pays
out of pocket for those services).
o The office is also assumed to be used by the Owner or his staff. Cost of supplies
are included, but not the cost of the staff.

Utilities related to the operation of the warehouse space are the responsibility of the
renter and will be charged billed to them on top of the regular rent.

Landscaping is limited to mowing grass, trimming bushes, and mulching.

Income Calculations:

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The rental and leasing rates were determined by comparison with other Pennsylvania
warehouses. A warehouse slightly over 600,000 square feet along I81 in Carlisle, Pennsylvania
was rented at a rate of $4.75 per SF. A slightly lesser number was used for the lease rate because
in that instance the leasee pays for utilities allowing for the price to drop
Cost Calculations:
Indoor Maintenance: Replacement of warehouse roofing, lighting, and office supplies.

$200/year average office supply costs per employee.

Warehouse lights were assumed to cost $2,250 per year

$25,000/year roofing, costing 25 per sq. ft.

Outdoor Maintenance: Snow removal, landscaping for a little more than an acre, after subtracting
10 acres of asphalt and 600k sq. ft. of warehouse space from 25 acre package.

$5400/yr. to mow once a week, trim bushes every three/four weeks, mulch once a year,
and plow snow from a 10 acre parking lot

Insurance: For property damage and general liability.

$25,000 a year for industrial property.

$25,000 a year for general liability which covers everything else, like work accidents or
being sued. Premiums actually fluctuate from case to case, but most are in the same
bracket as property premiums.

Security: Personnel only, equipment covered in general construction.

$12/hr. average wage for a security guard for a large building.

Advertising: Used for the promotion of the lease and renting.

$36.80 for a 30 word classified ad in the Daily Collegian in 5 issues.

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$1500 for a billboard along highway.

Risks:
State College is located in a relatively safe area, not prone to natural disasters such as
earthquakes, tornadoes, hurricanes, forest fires, etc. Crime rates are not exceptionally high and
the site design should have incorporated security features such as fencing and alarm systems. The
only physical risks to worry about are flooding, snow related problems (roof durability, snow
removal, etc.) and possibly downed trees from high winds which could be solved by keeping a
clear area around the warehouse perimeter.
To address the risk of excess snowfall, the cost of regular re-roofing as well as snow
removal has been added to the cost analysis. The risk of flooding should be mitigated by storm
water management features in the warehouse design, but the owner will no doubt want to have
flood insurance just in case, the cost of which is included as part of the overall insurance cost.
Financially, there is the risk of not being able to fund this project using a private bank
loan, as a bank may not want to invest so much money into a private project. In that
circumstance, the owner would have to post bonds, adding to the advertising expense and
complicating the cost analysis. Taking that into account, the financing will be done with a private
loan to be repaid back over 15 years. This is a relatively short time for such a large loan, meaning
there is a larger risk for loan repayment to fail.
Legally, the warehouse operates very safely. The environmental impacts of building a
warehouse should be considered by the designer, taking into account local regulations and codes
for land development. There are few regulations on the operation of the warehouse, which would
only apply to the renter since they are the ones supplying a warehouse workforce and dictating
their actions. General liability is also accounted for by purchasing general liability insurance.

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Discussion of Financing:
For the sake of calculating accurate figures in the EUAC and the present worth the ideal
situation of obtaining a private loan with an interest rate 3.5% over 15 years. These parameters
were considered the most reasonable after taking into account the average interest rate for a
multi-million dollar loan for industrial development and the risk a bank takes for loaning such a
large amount(s). For scenario one, the loan will cover the entire cost of construction and
repayment begins immediately. For scenario two, one loan is taken out to cover Phase I
construction and another loan is taken out at the beginning of Phase II construction. Repayment
for both loans begin when loan is received, interest rate and repayment length are still 3.5% and
15 years respectively.
Realistically speaking, a single private loan would not be an option for a project of this
size. Multiple loans most likely from multiple banks with have to be taken out in order to fund a
project of this size. The other option would be to further investigate private bonds. However, that
would require much more planning ahead of time and would be more applicable to Scenario 2
where you have a definite time frame of when you will begin construction of Phase 2

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Cash Flow Diagram and Computations

EUAC Evaluation:
When calculating the EUAC for each scenario, all costs were counted as positives and all
incomes as negatives. One-time expenses, such as Construction fees, Civil Engineering fees,
Architectural Engineering fees, and sitework fees were taken from future values and converted
into present values. One-time incomes, or loans, in this case, were also taken from future values
and converted into present values. Yearly costs, such as loan payments, and yearly operational
costs were taken from annuities and calculated into present values. Yearly income from rent was
also equated from an annuity to present value ($29,327,489.20 for Scenario 1 and
$13,360,281.48 for Scenario 2). Once the total present value for each scenario was calculated,
this value was used to find the EUAC ($2,557,400 for Scenario 1 and $1,200,000 for Scenario
2). This EUAC for each case was then compared to the other scenario.

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Summary of project:
The objective of this project is to compare two

different scenarios for

the

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construction of a 600,00 square foot warehouse, and find out which scenario is financially more
profitable (or cost less) than the other. In order to do this we calculated the EUAC for both to
find out how much each scenario costs on a yearly basis over 20 years. Each EUAC was
calculated using the estimated and given costs, profits, and financing. Scenario 1 was defined by
building the entire warehouse immediately and leasing out half of the facility (with an additional
2500 square feet of office space) for the first five years. The EUAC for that scenario was
summed up to $2,557,400 a year. The second scenario was defined by building half of the
warehouse immediately and then building the other half 5 years after construction is completed
on the first half. The EUAC for that scenario was calculated to $1,200,000 a year. From these
results a conclusion can be made that scenario 2 would cost less yearly over the first 20 years of
ownership.

References
Wages:

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http://www.payscale.com
Maintenance:
http://www.warehouse-lighting.com/warehouse-industrial/high-bay-lights
http://www.coolflatroof.com/flat-roof-prices.php
Advertising:
http://www.collegian.psu.edu/advertising_information/article_c6466b36-f6f8-11e2-ad7c0019bb30f31a.html
http://fitsmallbusiness.com/how-much-does-billboard-advertising-cost/
Insurance:
http://www.acegroup.com/us-en/businesses/warehouse-legal-liability-insurance.aspx
https://www.shipwire.com/w/support/inventory-insurance/
Lease rates:
http://www.loopnet.com/Pennsylvania_Warehouses-For-Lease/
Loan rates:
https://www.commercialloandirect.com/commercial-rates.php?id=3569220
Utilities:
http://www.seco.cpa.state.tx.us/TEP_Production/c/EPAEnergyStarSmallBusinessGuide.pdf

Meeting Minutes: Meeting 1

March 22, 2015

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Attendance:
Brandon Billy
Mark Bachman
Nathan Wadley
Ziyun (Tao Tao) Zhu
Robert Pflugh

Agenda:
A Planning the project timeline
1 A timeline/cash flow diagram was created
2 General brainstorm of ideas: list of costs, incomes, and information needed for project
3 Monday and Tuesday: get all cost estimates
4 Wednesday: calculate EUAC
5 Thursday: meet with Skibinski
6 Friday, Saturday, Sunday: Type up project report and touch up all project details
B Listing assumptions
1 Loan rates & payment schedules, lease rates, advertising/promotion, snow removal,
insurance, warehouse maintenance, utilities, security
2 Truck costs like fuel & maintenance are not considered
3 Low water usage
4 Assume minimal staff
5 Office construction is the main cost
6 Snowfall is not greater than average.
7 Risks do not happen in cost analysis
8 Gaining a profit from owning a warehouse.
9 Economic life begins from the start of design.
10 Owners objectives are cost, time, and quality
C Listing risks
1 Time delays & cost overruns
2 State College weather snow, cold, rain, sleet, etc.
3 Unforeseen conditions on the site, product shortages, strikes
4 Financial issues
D Listing unknown costs that need investigation
E Exchange of phone numbers, email, contact info, etc.
1 Brandon Billy bsbilly04@gmail.com
2 Mark Bachman markbachman340@gmail.com
3 Nathan Wadley nwad053@gmail.com

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4 Robert Pflugh flushot27@gmail.com

5 Ziyun (Tao Tao) Zhu zvz5096@gmail.com
6 Created project GroupMe for communication
7 Created project google doc for editing and sharing all gathered information for report
F Gathered general idea of financing plan
G Began EUAC calculations

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Meeting Minutes: Meeting 2

March 24, 2015

Attendance:
Brandon Billy
Mark Bachman
Nathan Wadley
Tao Tao Zhu
Robert Pflugh

Agenda:
A. Planning the project timeline
1. A timeline/cash flow diagram was created
2. Continued brainstorm of ideas: list of costs, incomes, and information needed for
project
3. Monday and Tuesday: most cost estimates gathered
4. Wednesday: calculate EUAC
5. Thursday or Friday: meet with Skibinski
6. Friday, Saturday, Sunday: Type up project report and touch up all project details
B. Listing assumptions
1. Owner hires all on-site warehouse staff after project is completed
2. Contractor takes care of insurance during construction
C. Listing risks
1. Time delays & cost overruns
2. State College weather snow, cold, rain, sleet, etc.
3. Unforeseen conditions on the site, product shortages, strikes
4. Financial issues
D. Compiled list of all unknown annual costs
E. Financing Plan
1. Compiled more in depth and detailed financing plan
F. Continued EUAC calculations for each scenario
1 Added in all annuity costs, such as insurance, maintenance, roofing, utilities, security,
etc.

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Meeting Minutes: Meeting 3

March 27, 2015

Attendance:
Brandon Billy
Mark Bachman
Tao Tao Zhu
Robert Pflugh

Nate was excused from this meeting.

Agenda:
A. Meeting with Skibinski
1. Checked up on the progress of the report
2. Established that there is a rental income from entity
3. Established grounds on how to create a cash-flow diagram
4. Cleared up all questions regarding the report

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Meeting Minutes: Meeting 4

March 29, 2015

Attendance:
Brandon Billy
Mark Bachman
Tao Tao Zhu
Robert Pflugh
Nathan Wadley

Agenda:
A. Cash-Flow Diagram
1. Whole cash-flow diagram was created and finished on CADD
B. EUAC Calculations
1. Finished all EUAC Calculations
2. Calculations were written out nice and clear
3. Used all costs, loan payments, and incomes in calculations
C. Began typing report
1 Project Description, Executive Summary, Assumptions, Risks, Discussion of
Financing
D. Planning the project timeline
1. Planned to meet sometime Tuesday to wrap up report and put everything together

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Meeting Minutes: Meeting 5

March 31, 2015

Attendance:
Brandon Billy
Mark Bachman
Tao Tao Zhu
Robert Pflugh
Nathan Wadley

Agenda:
A. Final wrap up of project
1. Formatted complete EUAC evaluation and Cash-Flow diagrams
2. Included more risks involved in taking on such a project
3. Created title page
4. Formatted entire report to look nice and neat
5. Created reference page of all references used in financing, assumptions, and risks
6. Completed Team Evaluations
7. Everyone read through entire project and critiqued any mistakes or questions
involved in the project
8. Put project in binder