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)

Appendix III Present-Value Interest Factors for One Dollar Discounted at & Percent for n Periods: PVIF. =; (1 + K) 8% 9% 10% 11% 12%% 13% 14% 15% 16% 17% Period 1% 2% 5% 901 893 877 870 562 855 980 971 962 952 943 935 926 917 909 961 .943 925 907 890 .873 857 842 812 797 783 .769 ,756 743 .731 .980 826 840 816 -794 .172 -751 731 712 693 .675 .658 641 624 971 942 915 889 .864 855 .792 763 735 -708 683 659 636 613 592 572 .552 .534 961 924 .823 519 497 .476 456 951 906 .822 .784 .747 .713 681 .650 .621 593 567 .543 480 .456 432 .410 390 942 868 837 .790 .746 .705 666 630 596 564 535 507 .354 333 .933 871 813 760 .665 .623 583 -547 482 .452 425 .400 .376 .789 .731 677 .627 582 540 -502 467 434 .404 376 .351 .327 .305 285 .923 914 766 703 645 .592 544 500 460 424 .391 361 .333 .308 284 .263 243 558 508 463 422 386 352 322 295 270 247 .227 .676 .614 195 .178 585 429 .388 .317 287 .261 237 215 .557 :444 397 .356 286 257 231 .208 187 .168 .152 530 415 .326 .258 229 .204 .182 .130 388 299 181 141 125 111 .505 160 481 16 140 123 . 108 .095 458 252 189 163 141 123 107 . 093 .081 436 .231 .170 .146 .125 .108 .093 .080 .069 130 .111 .095 .069 059 396 194 138 -116 .098 083 070 .060 .051 -178 .149 .124 .104 .087 .073 .061 .051 043 377 359 294 242 199 164 135 112 093 .077 064 .053 .044 .037 342 .226 -150 101 .083 .068 -056 046 .038 032 326 262 .211 170 .138 112 091 -074 060 049 .040 .033 .027 247 .197 158 .126 -102 .082 .066 .053 .043 .035 .028 .023 310 -038 .030 .024 . 020 .375 .295 .233 .184 -146 .116 092 .074 .059 047 .012 .009 -552 412 .308 .231 .174 .131 099 .075 -057 044 .033 .026 .020 .015 355 068 _049 036 026 .019 .014 .010 .008 .006 .004 .500 .253 . 181 .130 .094 .453 307 .208 .142 .097 .067 .046 -032 .022 .015 .011 008 .005 .004 .003 002 .003 .002 001 001 410 264 .171 .111 .073 .048 031 021 .014 009 .006 DO4 .372 228 141 087 054 .034 021 013 .009 005 .003 002 .001 .001 001 28% 29% 30% 35% 45% 50%% Period 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 769 741 .714 690 567 347 840 833 826 820 813 806 800 794 787 .78 .775 601 592 549 510 476 .444 718 694 683 672 661 650 640 630 620 610 .455 406 364 328 609 579 466 564 651 537 524 512 .500 488 477 350 301 .260 226 198 516 482 .467 451 .437 423 .410 .397 .373 361 43 402 386 370 355 341 328 315 303 291 280 269 223 .186 156 .132 .108 .088 .370 352 .335 .319 .303 .289 .275 262 250 238 227 .217 .207 -165 .133 279 249 .235 .222 .210 .198 .188 -178 168 -122 .074 296 263 . 159 059 314 051 .039 218 204 -191 .179 .168 .157 -139 .130 123 091 -068 .225 209 194 -180 -167 155 144 134 .125 .116 -108 .101 .094 067 .048 .035 .026 .073 .050 .035 .024 .017 191 176 162 149 .137 .126 .116 .107 099 .092 .085 .078 -037 .025 .017 .012 123 .112 103 094 -086 079 062 072 .008 .092 .083 069 052 1 047 .043 027 .018 012 .084 075 068 061 .055 050 045 .040 .037 .033 .020 .013 .008 .005 069 .062 .055 049 . 044 .039 035 .032 025 .015 006 .003 004 .002 057 .051 .045 040 035 031 028 025 .047 .042 .036 032 028 .025 022 .019 .017 .015 .008 .005 .003 .039 .034 .030 026 .023 .020 017 .015 .013 012 .006 .003 .002 .024 021 018 .016 014 012 .009 .005 .002 001 .032 .028 .014 007 .002 .027 .023 020 017 .012 :008 :003 .001 001 .022 019 .016 014 012 010 .008 007 .006 005 .002 .001 .018 .015 .013 .011 .009 .008 007 006 005 .004 .002 001 022 015 .013 011 _009 .007 .006 001 .018 012 010 .009 -007 005 .005 003 103 002 2001 015 010 008 007 006 005 004 :003 003 002 .002 001 013 .010 009 007 .006 005 .004 .003 .003 .002 .002 001 001 1007 005 004 003 .003 .002 002 .001 001 001 .001 -003 002 -002 .001 001 -001 001 .001 DO1 -001 001 "PVIF is zero to three decimal places. Copyright @ 1985 by Harper & Row, Publishers, Inc