Purchase Evaluation

Management is considering acquiring new office space by purchasing Zone A property which would cost $5,000,000 to buy today.

It has been estimated they could sell the Zone A property in 8 years for $8,500,000.

They will have to take a loan and pay an interest rate of 7.5% on that loan.

• What is the Present Value of the sale proceeds from the Zone A property?
• Should the fund purchase the Zone A property and if so, why?

The health fund realize they could rent out part of the one A property that is surplus to requirements and receive rent of $350,000 per year.

1. What is the Present Value of the sale proceeds from the Zone A property with rent?
2. Should the fund purchase the Zone A property with rent and if so why?

They receive a new offer of another building, the Zone B property but with slightly different conditions.

• It costs $500,000 less to purchase
• The rent to be received would be $150,000 less per year, however, the interest charged on the loan would be 1% less per year.

The Zone B property could be sold in 6.5 years, but they would receive $1,000,000 less than the Zone A property

1. What is the Present Value of the sale proceeds from the Zone B property?
2. Which is more attractive, the Zone A property (with rent) or the Zone B property?

The health fund has surplus funds available of $3,000,000 and can invest the funds earning 8% per annum

• How long would it take for them to have enough money to purchase outright
• The Zone A Property
• The Zone B Property

The health fund finds it only has $2,75,000 to invest but can utilize an alternative investment and earn 9.5% per annum

1. How long would it take for them to have money to purchase outright

1. The Zone A Property
2. The Zone B Property