Question
Question 3 Cap company has previously done preliminary study on the return of alternative option of office building on the same site. With more information
Question 3 Cap company has previously done preliminary study on the return of alternative option of office building on the same site. With more information gathered during the feasibility study stage, the company would like to work out the return using discounted cashflow method. The land cost shall be S$1.7 billion including all the transfer costs and taxes.
The latest market report shows that current market rent of office space at that area is S$ 125/sqm per month and expected to escalate at 3% p.a.
The consultant team advises that the development can still achieve 90% of Gross Floor Area (GFA) for Net Lettable Area (NLA). The construction period including design and tender is 36 months and the construction cost has increased to $ 3,800/sqm on GFA due to rising labour and material cost. The Professional and authorities' fees is estimated to be 15% on construction cost. The total construction cost and fees are spread equally over three years construction period.
Cap company's facilities team forecasts the monthly operating expense to be S$27/m2 on NLA with an escalation of 5% p.a. from the commencement of operation of the facilities. The occupancy rate for the tenanted areas is 70%, 80% and 95% on first, second and third year respectively. The occupancy rate of facilities will be stabilised at 95% thereafter.
This investment will be hold for four years after the construction and targeted to dispose the commercial building at 5% capitalisation rate to a fund at the end of the holding period.
Analyse the above information and answer the following questions.
(a) Apply the appropriate technique to project the cash flow for the project in Appendix I. You can ignore taxes and debt servicing. (15 marks)
(b) Appraise the Net Present Value of the project with a weighted average cost of capital of 9% in Appendix II and PVIF table is as shown in Appendix III. (10 marks)
(c) Using investment excel template, construct the cashflow for the project and analyse the project IRR and equity IRR. Cap company will use the equity to fund the land transfer from the parent company and the remaining will be funded by bank loan at interest rate of 8%. (15 marks)
(d) Demonstrate your understanding that using the bank loan will enhance the return of the project and under what circumstances the bank loan will adversely impact to the return. (10 marks)
| APPENDIX I | |||||||||
| PROJECT | Redevelopment of J Mall | ||||||||
| Year/$ M | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | |
| Land Cost | |||||||||
| Construction Cost | |||||||||
| Prof and Authorities Fees | |||||||||
| Gross Potential Income | |||||||||
| Rental Rate (nearest 2 decimal places) | |||||||||
| Rental Growth Rate | |||||||||
| Gross Income | |||||||||
| Vacancy rate | |||||||||
| Effective Gross Income | |||||||||
| Expenses | |||||||||
| Inflation Rate | |||||||||
| Net Operating Income | |||||||||
| Exit Sale Price | |||||||||
| Cap Rate | |||||||||
| Project Cash Flow |
| APPENDIX II | |||
| NPV Analysis | |||
| Year | Present Value | PVIF @ % | Project Cash Flow |
| 0 | |||
| 1 | |||
| 2 | |||
| 3 | |||
| 4 | |||
| 5 | |||
| 6 | |||
| 7 | |||
| Net Present Value (NPV) |
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An Introduction To Management Science Quantitative Approaches To Decision Making
Authors: David R. Anderson, Dennis J. Sweeney, Thomas A. Williams, Jeffrey D. Camm, James J. Cochran
16th Edition
0357715462, 978-0357715468
