Question

Cory's Garage Problem • Location: downtown Detroit • Issue: bank loaned $18 million to build a 12-story parking garage with 755 parking spots based on revenue projections of $15/day, 80% occupancy rate • Actual revenue results: $12/day, about 80 cars a day (10% occupancy rate) • Question: How many cars need to park there every day for Cory to get his interest payments? Extend the question to include ALL cash expenses (no depreciation). Cash Expenses: Interest-only loan (no principle for 5 years): 74% Property tax: 1.8 mil rate (-1.8% of property value) Security/Booth: 2 FTEs, minimum wage ($6.95/hr in 2006 which was the year this actually took place) + benefits (25% load rate). 24 hrs/day, 365 days a year Electricity: about $1.000 per month Other: cleaning, maintenance, liability insurance: about $1,000 per month 12 1) What is the CM/unit 0 > 12 2) What is breakeven point in units) for the year just on the interest? a) What is breakeven point per day, if we use 365 days? b) What is the breakeven point per day if we include only weekdays? 3) What is breakeven point in units) for the wear on all cash expenses? 4) Considering all cash expenses, by how many units would the breakeven point for the year decline if the garage could get $15 per day rather than $12/day. 5) Given the projections at the time, was the loan a wise decision? What was the projected revenue? What was the projected net cashflow per year before income tax)?

Answer 1

2. (A). Breakeven basis interest cost (while operate all 365 days)=

1305000/(365*12)= 298 vehicles need to be parked

2. (B) - while operate only on weekdays i.e. 260 days in a year=

1305000/(260*12)= ~418 vehicles need to be parked

3. Breakeven basis all cash costs

Interest cost	1305000
Property Tax	324000
Security wages	121764	(6.95*2*24*365)
Security Benefits @25% of wages	30441
Electricity	12000
Maintenance etc	12000
Total Fixed cost	1805205
Breakeven (minimum no. of cars to be parked to recover fixed cost)	412

4. Breakeven point will decline by 82 (412- 330)

5. Projecetd revenue was $ 3,306,900 per annum

Projected net cash flow was (in initial years of no principal repayment)= 1805205

Assuming loan was for total 15 years with only interest payment in initial 5 years and principal repayment to be started from 6th year. Thus in 6th year there would be additional cost of $ 1,800,000. Thus total cost wold be ~3,605,205 against revenue of 3,306,900 in 6th year and thus net cash flow would be negative. Thus ot was not a wise decision.