1. Mr. Mala is evaluating an investment project which is a small retailing centre near VIU. The following operation data had been provided by his broker:

• The property consists of 12 retailing stores.
• The current contract rents: 6 units at $1,600 and 6 units at $1,300 per month.
• Annual market rent increase is 4% per year.
• Vacancy and collection loss is estimated to be 10% per year of potential gross income.
• Net miscellaneous income from various vending machines is about $300 per month.
• Operating expenses account for 35% of the effective gross income each year.
• Capital expenditures amount is about 5% of the effective gross income each year.
• The going-out cap rate for the terminal value is 7% and the investment return (going-in IRR) required by Mr. Mala is 12%.
• Mr. Mala also estimates that the selling commission at the end of investment period is 5% of the forecasted transaction value.

Mr. Mala learnt that the most appropriate evaluation tool in this case is the discounted cash flow analysis method with a timeframe of 5 years. Mr. Mala is asking you, a MBA student at VIU, to help him out by determining the appropriate purchase price for this investment.

(Hint: use the Excel supplemental template for completing this problem.) (M6)

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Potential gross income

Vacancy & collection loss

Mis. income

Effective gross income

Operating expenditures

Capital expenditures

Net operating income