Question

Project Assumptions:

• Equity: $200,000
• $400,000, 11-year interest-only loan at 5% APR. (i.e. you pay 5% of the principle every year for ten years and repay the full loan amount when you sell the property. Assume the first payment is due when you sign the loan.)
• Operating expenses (once development is complete): $10,000
• Construction will take 2 full years, with the building opening at the start of year 2.
• You already have one lease signed for half the building starting in year 2 valued at $40,000 annually.
• In year 4 you expect to lease half the remaining space (an additional $20,000 annually) and by year 5 you will have the building fully leased at a total annual cash flow of $80,000.
• Finally, you expect to sell the building at the beginning of year 11 for $1,000,000
  1. Determine the IRR and NPV (with a required rate of return of 7%). SHOW your work how you end up with the answer for IRR & NPV.  If you choose to answer this question with excel, either upload you excel workbook or take a screenshot and past it into this document.

2. Based on the analysis in a, should you go ahead with this project? Explain why or why not.

Answer 1

NPV comes out to $99,994.83

The IRR comes out to be 8.7797% whereaas the required Rate of return was 7%, so you should go ahead with the project as the return is positive and in excess of the required rate of return.

I have assumed here that the interest is also paid at the time 0 as well when the loan was taken as you have prescibed in the question. Also I have assumed the operating exps. to be annual as it was not mentioned in the question whether these are one time or annual.

Net income is taken as the income less int. and operating exps.

Disc. factor is taken as (1+7%)^(-yr.no.) as 7% was the required rate of return.

It has been taken as income from sale occurs at the start of year 11, therefore the disc. factor used is the same as that of year 10.