Use IRR and Net Present Value (NPV) method. A property developer has purchased h

Question

Use IRR and Net Present Value (NPV) method.

A property developer has purchased half acre of land (2023.43m2), that costed him Aus. $1.1m. in Tarniet area (western Melbourne suburb).

The developer has three different plans to take a decision which could fetch him the high rate of returns.

As of to construct the units the cost is going up to $150k/unit. For constructing 10 units the cost is rising up to $1.5m. Thus the decision is to be made whether

To sell the land as is after 6 months, as the value will be increased by 6% over the time period.

Or

To make further investment by developing the land and selling as the whole residential units which could make more payoffs over time?

Or

To develop three types of residential units that is for high income group, medium income group and low income group and give them for rent/lease later on.

Using IRR and Net Present Value (NPV) method, this problem has to be solved

take some assumptions were ever required.

...Thank you very much..

Explanation / Answer

In this problem, certain thing are not expressed like cost of capital, sale price of developed units, time of sale i.e. cash flow moment, rent/lease amount to be received and period of rent flows.

Accordingly these assumptions are taken :

1. Cost of capital - 10%

2. Construction of 10 units can be completed and can sold at year 1 with a profit of 15% on total cost of development and land price.

3. land is developed for 3 groups at an additional cot of $2 Mn and can be rented for a annual rent of $0.3 for 20 years net of tax and all other expenditure. (other mantenance cost is ignored)

on the basis of above assumptions, problem is solved as follows:

Option 1 Sale value of land after 6 months (1.1 * 1.06) 1.166 DF @10% p.a. at the end of 6 months 0.9524 Present value of inflows 1.11 Present value of outflows 1.1 NPV 0.01 IRR 10% IRR Option 2 Sale value of 10 units Total Cost (1.1 + 1.5) 2.6 Add Profit @ 15 % 0.39 Total Sale Price 2.99 DF @10% p.a. at Year 1 0.909 Present value of inflows 2.72 Present value of outflows (1.1 + 1.5) 2.6 NPV 0.12 IRR 15.00%

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

---

---

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