You are the Financial Director of CoffeeBean (CB) Properties Ltd, a company invo

Question

You are the Financial Director of

CoffeeBean

(CB) Properties Ltd, a

company involved in the commercial property sector. CB is

considering the acquisition of the former ESSO station on Western

St. at a cost of

$

3.5MM. The Board has asked you to investigate a

number of possible projects to be undertaken on the site.

CB’s cost

of capital is 15

%. If

the site is to be developed it will have to be

decontaminated and cleared at a cost of

$

350,000,

payable in 1y.

•

Alternative

1:

Purchase and clear the

site, then sell

to

a developer

after 1

year for an

expected sale price

of

$

4MM.

•

Alternative

2:

Purchase and clear the site, develop a number of

retail outlets (construction time 2 years

). Cost

of

$

2MM

per year of

construction estimated. Sell retail units for

$

11MM at the end of

year 3.

•

Alternative

3:

Purchase and clear site, rent as car parking for 6

years, expected revenue

$

200,000 per

year starting at the end of

year 2. Sell at the end of year 7 for

$

5.5MM

Explanation / Answer

Present Value (PV) of Cash Flow: (Cash Flow)/((1+i)^N) i=Discount Rate=15%=0.15 N=Year of Cash Flow ALTERNATIVE #1 N Year 0 1 A Initial cost ($3,500,000) B Clearing Cost ($350,000) C Sales Price $4,000,000 D=A+B+C Total Cash flow ($3,500,000) $3,650,000 SUM PV=D/(1.15^N) Present Value(PV) of cash flow $       (3,500,000) $      3,173,913 $        (326,087) Net Present Value $           (326,087) ALTERNATIVE #2 N Year 0 1 2 3 A Initial cost ($3,500,000) B Clearing Cost ($350,000) C Construction cost $2,000,000 $2,000,000 D Sales Price $11,000,000 E=A+B+C+D Total Cash flow ($3,500,000) $1,650,000 $2,000,000 $11,000,000 SUM PV=D/(1.15^N) Present Value(PV) of cash flow $       (3,500,000) $      1,434,783 $       1,512,287 $ 7,232,679 $ 6,679,749 Net Present Value $          6,679,749 ALTERNATIVE #3 N Year 0 1 2 3 4 5 6 7 8 9 A Initial cost ($3,500,000) B Clearing Cost ($350,000) C Rental Revenue $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 D Sales Price $5,500,000 E=A+B+C+D Total Cash flow ($3,500,000) ($350,000) $0 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $5,500,000 SUM PV=D/(1.15^N) Present Value(PV) of cash flow $       (3,500,000) $        (304,348) $                      -   $      131,503 $     114,351 $ 99,435 $ 86,466 $ 75,187 $ 65,380 $ 1,563,443 $ (1,668,582) Net Present Value(NPV) $       (1,668,582) Alternative #2 has highest NPV

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

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