Question

Woodbridge crop. is assessing the viability of a new condo project. It would need to spend $2 million to purchases the land today and then $2 million per year for each of the next two years to build the condo development which would have 20 units.

Woodbridge will conduct an auction at the end of the year one to sell the first 10 units which are expected to sell for an average price of $350,000 each.

At the end of year two the remaining 10 units would be auctioned and are expected to sell for an average price of $375,000 each. There is no residual value to the developer.

If the appropriate discount rate is 15% - what is the NPV of this project? Assume that all cost and revenue items occur at the end of the year( except of course the initial land acquisition.) What is the NPV if the appropriate discount rate is 30%?

Answer 1

NPV of the project when discount rate is 15%:

Year	Initial Investment	Revenue	Cost	Cash Flows (Rev-Cost)	Working of DF	Dicounting Factor @ 15%	Present Value (CashFlows*DF)
0	-20,00,000	-	-	-20,00,000	1	1.00	-20,00,000.00
1	-	35,00,000	20,00,000	15,00,000	1/1.15	0.86957	13,04,347.83
2	-	37,50,000	20,00,000	17,50,000	1/1.15^2	0.75614	13,23,251.42
						NPV	6,27,599.24

.

.

NPV of the project when discount rate is 30%:

Year	Initial Investment	Revenue	Cost	Cash Flows (Rev-Cost)	Working of DF	Dicounting Factor @ 15%	Present Value (CashFlows*DF)
0	-20,00,000	-	-	-20,00,000	1	1.00	-20,00,000.00
1	-	35,00,000	20,00,000	15,00,000	1/1.30	0.76923	11,53,846.15
2	-	37,50,000	20,00,000	17,50,000	1/1.30^2	0.59172	10,35,502.96
						NPV	1,89,349.11

.

Note:

Revenue for Year-1 : 350,000*10 = $35,00,000

Revenue for Year-2 : 375,000*10 = $37,50,000