Question 1 A land-Sale & Leaseback Investment (28 marks) - Can you help me to find the answer for table A and Table B?

(For this question, assume annual compounding)

GS is considering investing in a high-tech manufacturing facility. The estimated cost today at End of Year 0 (EOY0), and the Net Operating Income (NOI) projections over a five-year holding period are shown below.

Table A				Table B
EOY	Cost	Projected NOI		EOY	Cost	Projected NOI
0	$88,000,000			0	$89,000,000
1		$ 8,600,000		1		$ 8,600,000
2		$ 9,000,000		2		$ 8,900,000
3		$ 9,200,000		3		$ 9,100,000
4		$ 9,500,000		4		$ 9,200,000
5		$ 9,900,000		5		$ 9,500,000
6		$ 10,100,000		6		$ 10,200,000

GS can secure a 60% Loan to Value ratio (LTV) bullet loan at an annual contractual rate of 8% for 20 years. This means that GS only pays interest on the loan each year and the entire principal is due at loan maturity.

1. GS projects that the reversionary capitalization rate when the facility is sold at the end of Year 5 [EOY5] is 13%. Should GS invest if the required rate of return is 10%?

(6 marks)

Suppose GS can negotiate a land-sale leaseback (LSLB) arrangement to sell the land component of the facility at the end of Year 3 [EOY3] for $38 million and rent the land back from the new landlord by paying rental in the amount of 7% of the sales price of the land. Further, GS can get $42 million from the sale of the building EOY5.

2. If GS does not have to repay its bullet loan till the EOY5, compute the Net Present Value (NPV) and internal rate of return (IRR) of proceeding with the LSLB.

(4 marks)

3. State what financial effect(s) can explain the differences between your answers in parts (a) and (b). Advise GS on the financial feasibility of the LSLB option.

(6 marks)

4. Should GS prepay the bullet loan at EOY3 if the LSLB option is taken? Would your answer be different if manufacturing facilities such as the one GS is considering will appreciate in value over time?

(6 marks)

5. Other than negotiating for lower costs and better sales prices, propose what else GS can do to enhance the financial return on the project.

(6 marks)