The Property Development Group (PDG) is considering the purchase of a large comm

Question

The Property Development Group (PDG) is considering the purchase of a large commercial property block in central Paris. The cost of the property is E5.6 Billion and the anticipated act rental income from the properties is as follows: PDG expect to sell the property at the end of year 5 for E6.0 Billion. PDG enjoy net investment returns in the order of 16% to 18% p.a. on their existing investments, and are not interested in investments with a return less than 15%. (reminder El Billion = E1000 million) Using DCF techniques, evaluate the above investment opportunity for PDG, and give an approximate estimation of the actual Wit expected to be earned. (15% Discount Factors - Years 1 to 5: 0.870; 0.756; 0.658; 0.572; 0.497). (100 marks)

Explanation / Answer

DCF is the valuation of individual cash flows per year, divided by the discount factors as given Hence, for this project of PDG : DCF = 550 + 600 + 600 + 650 + 700 1+.87 1.756^2 1.658^3 1.572^4 1.497^5 $ 819.8904 million $ 0.81989 billion Profit on Sale of Property (Sale Value - Cost) 0.4 $ billion Since the DCF is more than the adjusted cost of the property (profit on sale), it is advisable to continue the project. Based on the trial and error method, the IRR for the project is worked out as 0.01 10.40%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.