The Bank of Australia (BA hereafter) construction division specializes in lending to construction companies. You are working for BA as a responsible lending officer. Melbourne Builders Ltd (MB hereafter) has approached you with a property development proposal.MB has used the proceeds of some recent sales to retire its existing debt.MB has been concerned by a recent money-laundering scandal and has decided to switch banks based on ethical concerns.

MB has presented to your bank a funding proposal (explained below), and you have been tasked with determining the line of credit the bank should provide.

MB has recently negotiated to purchase a block of land, the purchase of the land would cost $650,000, and it is intended to build three new townhouses on this block of land at the cost of $95,000 each.The land already has a pre-existing house on it in need of renovation.MB estimates the costs of renovations of the pre-existing house to be $40,000.

Based on recent local sales, the renovated house could be sold for $255,000, and the three new townhouses could be sold for $285,000 each.It is estimated that planning permits and provision of necessary services (water electricity, etc.) will cost $19,000.

(a) Is this project financially viable?What is the expected margin or shortfall from this project (in both dollars and percentages)?

(b) How would you structure this loan?

(c) What are the potential concerns with this project?