Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Tanner Ltd is a company which purchases and renovates large country houses. It is considering the purchase of Palmer Ltd which is expected to sell

image text in transcribed
Tanner Ltd is a company which purchases and renovates large country houses. It is considering the purchase of Palmer Ltd which is expected to sell at auction for $1.8m. The company wishes to renovate the property and convert it into nine luxury apartments which will be sold for $600,000 each. The project will take two years to complete and will be in two phases. Phase 1 will be creation of six apartments at a total cost of $2m. These costs are agreed with the building contractor and will be paid at the end of the first year of the project. It is hoped that the apartments will be sold in advance, off plan, with the completion of the sale and receipt of cash being at the end of the first year. Phase 2 will be completed at the end of the second year with the three remaining apartments costing a total of $1.2m to convert. The cost will be paid and cash from the sales received at the end of the second year of the project. The company has a cost of capital of 12 per cent per annum. The project team are certain about the other assumptions necessary to appraise the project, that is the auction price of Palmer, the sales price of the apartments and the company's cost of capital. Required: (a) Calculate the net present value of the project assuming all the stated assumptions are correct. (6marks) (b) Present calculations to show each of the following changes to the stated assumptions: (i) What auction price for Palmer Ltd would result in a zero net present value for the project? (ii) What is the sale price for each apartment, which would cause the project to have a zero net present value? (iii) What is the cost of capital which would cause the project to have a zero net present value? (14 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Auditing a business risk appraoch

Authors: larry e. rittenberg, bradley j. schwieger, karla m. johnston

6th Edition

9780324645095, 324645090, 978-0324375589

More Books

Students also viewed these Accounting questions

Question

Understand corporate and HRM strategy.

Answered: 1 week ago