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Q2. XYZ company is considering building a new office building.  XYZ already owns a plot of land...

Q2. XYZ company is considering building a new office building.  XYZ already owns a plot of land worth $2M and has paid an architectural firm $300k for building designs.  Construction cost for the building is $1M.  Projected rent income from the building is $400k/year and interest expense will be $300k/year.  After three years XYZ expects to sell the building and land for $2.5M.  If XYZ has a required rate of return of 10%, what is the NPV and IRR of building the office building?

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Expert Solution

Value of land and cost of building designs is sunk cost. Cash flows are as below.

Year Construction Rental income Interest expense Salvage Net Cash flow
0 -1000000 -1000000
1 400000 -300000 100000
2 400000 -300000 100000
3 400000 -300000 2500000 2600000
NPV 1126972.20
IRR 43.40%

NPV and IRR are computed using excl functions as below

jeff jeffy answered 1 year ago
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