You identify a vacant piece of land zoned for industrial warehouse use which you

Question

You identify a vacant piece of land zoned for industrial warehouse use which you can purchase for $3.0 million today (an amount which will need to be paid immediately).

After detailed analysis you find that constructing the warehouse will take one year and cost $2.2 million (which will need to be paid at the end of Year 1).

Once the building is completed (at the end of the first year), you plan on renting out the space at an annual profit (after all expenses) of $410,000 to be received at the end of each of the following thress years.

Finally, having established a track record, you plan on selling the retail strip mall for $6.0 million at the end of the fourth year.

1) Using a table, lay out the stream of cash flows from this project. Clearly indicate the period and the cash inflow/outflow during each period. Note, if done correctly, your table should have a total of 6 rows.

Explanation / Answer

The total cash flow and yearly cash balance has been given in the below table:

Dates Income Expenditure Amount with us 01-Jan-15      3,000,000           - 3,000,000 31-Dec-15      2,200,000           - 2,200,000 31-Dec-16       410,000                 410,000 31-Dec-17       410,000                 410,000 31-Dec-18       410,000                 410,000 Selling cost    6,000,000              6,000,000 Total    7,230,000       5,200,000 Total profit    2,030,000 Profit % 28%

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