Real Estate Appraisal

QUESTION 13

1. Reproduction cost

   		Is the cost associated with the construction of a substitute of like utility
   		Is the cost to construct an exact duplicate of the subject improvements
   		Is always the same as replacement cost
   		Can only be estimated by a contractor or an architect

1 points   

QUESTION 14

1. Direct costs are

   		Expenditures for items that are necessary but not usually included in the construction contract
   		Expenditures for the labor and material used in the construction of the improvements
   		An incentive that is market derived and provides compensation for the developer
   		The costs associated with fees and interest

1 points   

QUESTION 15

1. Physical deterioration refers to

   		Losses in value from wear and tear
   		Losses in value from all causes
   		Losses in value from changes in market tastes
   		Losses in value from proximity to an adverse condition in the neighborhood

1 points   

QUESTION 16

1. If a property has diminished valued because of factors outside the property, the loss is classified as:

   		Functional obsolescence
   		External obsolescence
   		Physical obsolescence
   		Physical depreciation

A proposed cost-saving device has an installed cost of $645,000. The device will be used in a five-year project, but is classified as manufacturing and processing equipment for tax purposes. The required initial net working capital investment is $55,000, the marginal tax rate is 35%, and the project discount rate is 9%. The device has an estimated year 5 salvage value of $75,000. What level of pre-tax cost savings do we require for this project to be profitable? The CCA rate is 20%.

Analyzing Cost

Establishing the cost of the products and your profit will be very important. Your sales price and the amount of labor, clay and slip are in the following table.

Table 1: Prices and Contents

From the above table, the bowl sells for 35 dollars, and requires 1 hour of labor, 4 pounds of clay and 2 ounces of slip. The mug and plate data are also in the above table. In this model labor is a variable cost. To price the variable elements, the labor is ten dollars per hour, the clay is 80 cents per pound and the slip is 25 cents per ounce. The shop is on an incentive system and based on the number of units produced the employees’ salary will be increased to provide ten dollars for each bowl and plate produced and fifteen dollars for each mug produced. If the employee is extremely slow the base rate will be used; however, the shop has never had an employee that slow. The fixed cost per year is $48,000 for the shop. This cost includes rent, utilities, and insurance. Given the average price and variable cost per unit, what is the breakeven quantity per year, per week and per day of operation (assume a 6 day work week.)? To simplify this calculation use the average sale price and average cost of the units. Your breakeven number should be the total units (bowls, mugs and plates) sold.

Machine X has a first cost of $70,000 and an operating cost of $21,000 in year 1, increasing by $500 per year through year 5 with a salvage value of $13,000. Machine Y has a first cost of $62,000 and an operating cost of $21,000 in year 1, increasing by 3% per year through year 10 with a salvage value of $2000. If the interest rate is i =19% per year, evaluate which machine must you choose on the basis of:

(a) the present worth analysis,

(b) the conventional B/C analysis

(Show me all the steps)

Question 1

ABC company is considering producing a new range of smartphones that will require it to build a new factory. The project itself will go for 20 years. Feasibility studies have been done on the factory which cost $5 million. The studies have found the following:

1. The factory will cost $25 million and will have a useful life of 25 years.
2. The land where the factory will go is currently used as a carpark for workers and it is assumed that the company will have to pay $50000 per year for their workers to park in a nearby carpark.
3. The factory will be depreciated on a straight line basis and will have a salvage value of $0 but it is believed that most of it can be sold for scrap and parts after 20 years (at the end of the project) for $500000.
4. Due to the nature of the business they are in, they will have to perform some environmental tests to make sure that some of the chemicals they are using are not entering the ground water around the factory. These tests will be performed every 5 years and initially cost $625000 (in five years) and then increase at the rate of inflation which is predicted to be 2.5% per year.
5. Through the building of this factory and the selling of the phones it produces, it’s revenue will increase by $5 million in year 1 and then by 7% per year for 10 years and then decrease by 2% until the end of the project.
6. The extra costs that the company accrues per year due to the project are $400000 for labour, $45000 for overhead like power and water bills and marketing costs for the new line of phones will be $500000 per year but will decrease by 10% per year as the phone gains greater penetration. It is also predicted that labour costs will increase by 2% per year due to inflation.
7. The company’s current cost of capital is 5% per year.
8. The tax rate is 30%.
9. The project requires an initial investment in working capital of $1000000 and will be increased by 5% for the first 5 years of the project and then does not change until the end of the project. It is returned in year 20.

Use the above information to answer the following.
A. Calculate the free cash flows that come from this project for the 20 years it is operational.
B. Calculate the NPV, IRR and payback period of the project. Should they go ahead with the project?
C. Calculate the break-even point for the following variables :
a. The overhead.
b. The initial yearly revenue.
c. The initial labour cost.
d. The initial advertising cost.

Question 2

The figures used in questions 1 are based on a neutral economic forecast of the future. Below are two additional situations that could occur.

1. A long term boom would lead to revenue being 10% higher than as described above. In addition all costs would be 5% higher. The cost of capital will be 4%
2. A long term recession would lead to revenue being 10% lower than as described above. In addition all costs will be 3% lower. The cost of capital will be 12%.

Use this information to complete the following questions.
A. Perform a scenario analysis that shows how the NPV would change if these situations came to fruition. Comment on your results.
B. Imaginethatyoupredictthatbothoftheabovescenarioswouldoccurwith50% probability. Would this change your decision from question 1? Explain.

Question 3

After some research you find that the cost of capital you have been given in the previous questions was an arbitrary number someone thought was appropriate and is in fact not based on the fundamentals of the company. As such you take it upon yourself to calculate a more accurate measure. After doing some research you find the following information on the company’s capital structure:

1. The company has previously issued two types of bonds:
A. 10000 bonds with a face value of $1000 and a coupon rate of 6% that makes payments every quarter. The current yield is 10% and the bonds have 10 years to maturity.
B. 500 zero-coupon bonds with a face value of $10000 that have a 20 years to maturity. They currently have a yield of 12%.

2. The company’s beta (systematic risk) is 1.3, the expected return on the market is 7% and the risk free rate is 2%. There are 100000 shares on issue that currently sell for $15.26.

Using this information answer the following questions:
A. Calculate the cost of debt.
B. Calculate the cost of equity.
C. Calculate the WACC.
D. Recalculate the NPV and state whether your decision from question1 is changed.

Case – Bromiis Inc.

Bromiis Inc., is an international ethical medical research drug manufacturer that specializes in antibody science and the development and marketing of cancer treatment products. The 15 wholly owned subsidiaries and separate divisions that constitute the organization are highly decentralized, but they receive overall direction from a small corporate staff at parent-corporation headquarters in Menlo Park, California. The laboratories division, research division, and all corporate offices are located at the home- office site. Each of the divisional staff areas operates as a cost center. That is, labs accounting, labs production, labs sales, research accounting, and computer (Electronic Data Processing: EDP) systems also function as individual cost centers, and they provide their services to Research, Labs, and other divisions as necessary.

Until recently, no costs of the corporate service cost centers were allocated to the divisional cost centers; they were simply lumped together as central corporate overhead. Recently, however, it was decided to start charging the operating units (that is, the cost centers) for their EDP usage. Prior to this time, EDP services were simply requested as desired by the cost centers; priorities were determined by negotiations, with ultimately recourse to an EDP control committee (each cost center was represented); and all charges were absorbed as corporate overhead.

EDP systems contain both systems programming services and computer operations. In the current “charge-back” systems, the EDP director prepares a budget at the start of each quarter based upon his estimates of user demand. Using full absorption costing, he/she then computes an hourly charge rate, which he/she promulgates to the user cost centers. The users prepare their budgets utilizing his charge rate and their estimates of the services they think they will be needing. When a user desires to undertake any specific project or use EDP services, he/she negotiates an agreement with EDP on the hours (thus cost) that he/she will be charged. The user is free to reject the EDP “bid” and obtain outside services if he/she does not feel the EDP job estimates are reasonable. Also, since many projects last a year or more but service agreements are arranged on a quarterly basis, the user can drop a project in midstream at the end of a quarter if his/her overall budget should become too tight. If the actual hours needed to complete a given job exceed those contracted for, the EDP center must absorb the extra cost as an unfavorable variance.

The performance of all cost centers is evaluated on the basis of how closely their actual results match budget. Thus, the EDP director must ensure not only that his actual expenditures coincide with those that were budgeted but that he is able to bill others centers for all his actual charges. He must be sure that he contracts for enough projects from the users to absorb his budget.

The shift to the charge-back method was imposed by the corporate financial vice-president for the “purpose of putting control and responsibility for expenditures where the benefits are received”. The VP also felt the move was necessary to avoid a “mushrooming of the EDP group” and to make users more aware of the costs they were incurring. An additional factor mentioned was an almost irresistible tide of “allocationism” prevalent in local industry because of the overpowering influence of government

contracting there. He/she does feel he/she will resist allocating the other services, however, with the possible exception of printing and production, which has grown to be quite costly in the last few years. The major rationale for not allocating the other services is that they are all uniform, predictable functions, whereas the EDP services are more spasmodic and project-oriented.

The head of the EDP group is strongly opposed to the new system. He/she believes that there is “too much lip service paid to the specialized nature of computers” and that the new system is reducing the effectiveness of the EDP group to the corporation as a whole. He/she and several of the users-directors believe the shift was simply a political maneuver on the part of the VP to consolidate the EDP empire under the aegis of the corporate staff. The head of the EDP group believes a nonchargeable system administrated by the EDP control committee would yield better results.

REQUIRED:
Main Problem (s)/Issues

Analysis
Alternatives (3)

Conclusion

Recommendation

Recent research has made possible the development of a sensing device. The company that own the Research (HALA) has just work on a process for mass-producing the device. The visibility study provides the following information:

• The estimate of annual sales would be 1,500 units if the device were priced at $85,000 per unit (in dollars of the first operating year).
• HALA would need a new manufacturing plant. This plant could be built and made ready for production within 2 year.
• HALA would need a 30-acre tract of land that would cost $2 million; the land could be purchased on December 31, 2021.
• The new manufacturing plant building would cost $6 million and would be depreciated according to the Straight-Line (SL) Method.
• A first payment of $2 million (out of the manufacturing plant building cost $6 million) would be due to the contractor on December 31, 2021, and the remaining $4 million on December 31, 2022.
• The required manufacturing equipment would be installed and would be paid for on December 31, 2022. The equipment cost is $145 million, plus a further $5 million for installation. The equipment would be depreciated according to the Double Declining Balance (DDB) Method.
• The project would require an initial investment of $15 million in working capital. This investment would be made on December 31, 2022.
• The project’s estimated economic life is 7 years (starting after the 2-year construction period).
• At the end of the project lifetime, the land is expected to have a market value of $2.5 million, the building a value of $500,000 and the equipment a value of $5 million.
• The estimated total variable manufacturing costs would $14 million yearly.
• Fixed costs would be $20 million for each year of operations.
• Since the plant would begin operations on January 1, 2023, the first in flow cash would occur on December 31, 2023.
• HALA has $5.4 million budget for research and development (R&D). The company has already expensed all of it to date on R&D.
• HALA’s market interest rate (MARR) is 25%. Any capital gains will also be taxed at 40%.

Your report must provide answers for the following:

Part one:

1. Construct the Income Statement, and Cash Flow Statement for the project
2. Determine the Net Cash Flows, PW, and IRR of the project.
3. Comment on “Gains tax” and “Sunk cost” amounts if there is any.

Part two: New Information

• By December 31, 2024 Unit prices, Variable manufacturing costs, and Fixed overhead costs are expected to increase with inflation rate of 5% yearly
• By December 31, 2023 working capital is projected to increase with inflation rate of 4% yearly over the life of the project.

1. Determine the Net Cash Flows, PW, and IRR of the project, with inflation.
2. Comment on the effect of the inflation on PW, and IRR of the project.
3. Comment on “Gains tax” and “Sunk cost” amounts if there is any.

Part three:

1. Would you recommend that the firm approve the project under the case of no inflation?
2. Would you recommend that the firm approve the project under the case of inflation?

Part four:

1. What is the break-even for demand of the project under case of no inflation?
2. What is the break-even for demand of the project under case of with inflation?

Conduct a Sensitivity Analysis for the project with inflation and comment

Price-Demand Equation x = 2750-25p

Fixed Cost 8000

Variable Cost 50

Construct the cost function C(x) and describe the monthly cost of this business.

Construct the profit function R(x) and describe the monthly revenue. Determine the domain of R(x) which represents the range of units it could produce.

Construct the profit function P(x), determine break-even points, what production levels are profitable, what levels incur a loss. graph this.

at a monthly level of production within the domain of the revenue function (you can select within the profitable amount), determine the total cost, revenue, and profit at this level. Then determine the marginal cost, marginal revenue and marginal profit plus interpret these.

According to the price – demand equation, at what unit price ($p)) are you selling your product if demand is at your chosen production level? Write a function for the elasticity of demand E(p). Is E(p) elastic or inelastic, why? how increasing or decreasing the price would affect revenue. What unit price would result in unit elasticity?

What is the optimal production level that will maximize profits and find the max profit, show equation and graph.

Determine the revenue and cost at this optimal production level. Use the price – demand equation to determine what price should you sell each unit so that you can maximize profit.

Imagine the year is 2018, long before COVID-19 . Your family has started a new venture: operating a car wash near a popular lakeside resort, just outside of Prince George. There are many other car wash ventures nearby, and there seem to be new ventures opening and closing all the time. You can see that the customers care only about finding the cheapest price for car washes; they do not care which car wash they use. Your family purchased the equipment and the building for the car wash. You were able to spend $1,000 of your savings to go towards this purchase. To cover the rest of this expense, you took out a small business loan. The cost of the loan comes to $15 per day for the next 3 years. Your venture must hire labor and purchase cleaning solutions, car wax, etc. to operate the car wash. After some research you have figured out that the cost for labor and supplies is as follows: Number of car washes sold per day Total cost for labour and supplies 1 $10.67 2 $12.67 3 $16.00 4 $20.67 5 $26.67 6 $34.00 7 $42.67 8 $52.67 9 $64.00 10 $76.67 11 $90.67 12 $106.00 13 $122.67 14 $140.67 15 $160.00 16 $180.67 17 $202.67 18 $226.00 19 $250.67 20 $276.67 ECON 201 Introduction to Microeconomics 2 • When the lakeside resort is open, you observe that you can charge a price of $15.00 per car wash. • When the resort is closed, the demand for car washes is much lower. You are only able to charge a price $6 per car wash. Right now the resort is open. Currently you are selling 17 car washes per day. Your family wants your advice. Prepare a 1-2 page report to advise your family what to do now AND what to do when the resort is closed. Use the report to help them understand why they should follow your advice. Remember that this report should be written as if it is advice to your family, and it must show your family how you came up with the advice. What do you suggest, and why do you make the suggestions you do?