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%). 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

Please find below the calculations.

	Equity	200000
	Debt	400000		11 year interest only loan with 5% APR
	Opex	10000		when property is completed
	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Construction Costs	-6,00,000
Lease rental			40000	40000	60000	80000	80000	80000	80000	80000	80000
Opex			-10000	-10000	-10000	-10000	-10000	-10000	-10000	-10000	-10000
Repayment of Interest	-20000	-20000	-20000	-20000	-20000	-20000	-20000	-20000	-20000	-20000	-20000
Repayment of Loan										-400000
Proceed from sales										1000000
Total Cash Flows	-6,20,000	-20,000	10,000	10,000	30,000	50,000	50,000	50,000	50,000	50,000	6,50,000
	IRR	4.6%
	NPV (@7%)	-1,04,746.99

Beginning of year 11 is taken as end of year 10 for ease of calculation.

Part 2: You shouldnt go ahead with the project given the expected return is higher than IRR and the NPV is negative