FIN 351 -Investment Analysis have been asked by your client to evaluate an inves
ID: 2783381 • Letter: F
Question
FIN 351 -Investment Analysis have been asked by your client to evaluate an investmert As a real estate consultant you asked proposition that they are considering as follows: Jill has the opportunity of purchasing a small Legal costs associated with the purchase would be $800 retail outlet for $200 000. -The shop requires $25,000 worth of renovations which will be completed before settlement date. settlement da $25,000 Once the property is renovated it can then be rented for $375 per week. . Assume the property will have no ownership. 10 borrow hanmortgage,at 1 Jill intends to interest-only of the property Annual estimated expenditure, including property taxes is $3,000 per year bad debts during the periodf half the total purchase costs and related expenses on mortgage, at 12% interest rate, repayable on the sale a) A 4 year holding period. b Inflation rates of 2% per annum. Rental increases at half the inflation rate. Legal expenses remain constant. Real Estate percent as Jill has decided to sell the property privately to an acquaintance. Annual rent reviews. All costs increase at the inflation rate. State any further assumptions you decide to make. d) e) on sale at the end of the holding period is zero f) analysis is the only comprehensive way of evaluating properties whilst Cash flow allowing for the impact of borrowing. Please answer the following questions using net present values (NPV) and internal rates of retun (IRR) as part of your analysis. What would Jill have to sell the property for, to achieve a 15% return on equity? 1) 2) Assume the same situation as above but that the property can be sold at the end of the holding period for what it cost to buy the property (total purchase costs) increasing each year at the rate of inflation. Also, assume a mortgage, as above, but at 20% and inflation at 15%. 3) Assume the same situation as in option 1. Jill is uncertain whether she should renovate the shop. Which of the following alternatives should she choose & why? (i)Her analysis of the market indicates that if she renovates the shop, the market rental will be $375 per week (as above) and she will be able to sell the property in 4 years for $320,000. ) Alternatively, if she does not renovate, she will only be able to charge per week and sell the property for $290,000.Explanation / Answer
1. Total cost($)
Total purchase=200,000
legal cost=800
Renovation=25000
Total cost=200000+800+25000=225800
ROE=15%
Interest cost of selling is =(225800/2)*0.12=13548
Total annual expenditure=3000
Total cash outflow=225800+3000=228800
Total selling is 15% =x-228800/228800
3432000=x-228800
=3432000-228800=x
3203200=x
subtract the interest rate which is 3203200-13548=3189652
This is selling price for the property=3189652
2.cashoutflow at the beginning of year t0=228800
t1=228800*(1+0.15)^1=263120
t2=263120*(1.15)^2=347976
t3=347976*(1.15)^3=529228
t4=529228*(1.15)^4=925623
NPV=cash inflow if property hold for 4 year period=925623 and cost of inflow if 205920
cost of Mortgage
TO=225800
T1=270960
T2=390182
T3=809082
T4=1677713
since its better to mortgage and earn on that interest which is fetching a net profit 1471793 as compared to selling it in the market.
3. a) Renovation cost Rent per annum=18000 and for 4year =72000 selling price would be 320000. so it wise to sell a property than to rent it.
b)Renovation cost rent per annum =15600 and for 4 years =62400 and selling price would be 290000. so again it is wise to sell the property the to rent it.
(ends)
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