Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Freal is a commercial real estate developer. It is interested in acquiring land to build a shopping centre. The cost associated with land acquisition and
Freal is a commercial real estate developer. It is interested in acquiring land to build a shopping centre. The cost associated with land acquisition and construction is estimated to be $70 million. There are two options available to Freal: 1. A Lease option where the company sells the property in year 1 and undertakes a leaseback for two more years; 2. A Sale option where the company sells the property at the end of year 3. The cash flows for the lease or sale option are: Year Lease ($ million) Sale ($ million) 1 60 8 2 10 8 3 10 85 a. Assume a required rate of return of ten percent per annum. Calculate both NPV and IRR for the Lease option & the Sale option. Which is the preferred option? Please explain (5 marks) b. The directors of Freal would like to know the incremental IRR to help them with their decision. Calculate the incremental IRR and explain which option you should choose based on the incremental IRR. (5 marks) Assume that with the addition of an outlay of $1 million at year 3, the company can leaseback the property for one more year, generating an additional cash flow of $11 million in year 4. c. What impact does this have on your choice of project? Support your conclusion with an appropriate set of calculations. (10 marks) Freal is a commercial real estate developer. It is interested in acquiring land to build a shopping centre. The cost associated with land acquisition and construction is estimated to be $70 million. There are two options available to Freal: 1. A Lease option where the company sells the property in year 1 and undertakes a leaseback for two more years; 2. A Sale option where the company sells the property at the end of year 3. The cash flows for the lease or sale option are: Year Lease ($ million) Sale ($ million) 1 60 8 2 10 8 3 10 85 a. Assume a required rate of return of ten percent per annum. Calculate both NPV and IRR for the Lease option & the Sale option. Which is the preferred option? Please explain (5 marks) b. The directors of Freal would like to know the incremental IRR to help them with their decision. Calculate the incremental IRR and explain which option you should choose based on the incremental IRR. (5 marks) Assume that with the addition of an outlay of $1 million at year 3, the company can leaseback the property for one more year, generating an additional cash flow of $11 million in year 4. c. What impact does this have on your choice of project? Support your conclusion with an appropriate set of calculations. (10 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started