what is the present value of the property under each scenario using a discount cash flow analysis, what is the internal rate of return for each scenario?
You are an employee of Real Estate Investment (REI), Inc. and you are tasked with evaluating a project for development by the rm. The project would consist of a 400,000 square foot ofce building totaling 10 stories. If the project is approved, REI will construct the building on a l.3-acre tract of land which they acquired for $4.5 million. The cost of construction on the project is $28 million. The building, once constructed, will be leased to various tenants requiring oice space. Based upon projected market conditions, REI has come up with 2 possible scenarios for the leasing of the building. In scenario 1, the expected initial lease rate is $19.00 per square foot, with an anticipated increase in lease rates of 5 percent annually, and a vacancy rate of 4 percent. In scenario 2, RE] projects a lower annual lease rate of $18.00 per square foot. Under the second scenario, REI anticipates lease rates increasing at the same rate as in scenario 1, but projects a vacancy rate of only 3 percent. In both scenarios, RE] projects other income at 1.5 percent of gross rental income from the property. RE] plans to develop, lease, and manage the property for ten years, at which time the property will be sold. REL, INC. PROJECT ANALYSIS Scenario 1 Scenario 2 Operating Expenses in Year 1 Per Square Foot Per Square Foot Real Estate Taxes $2.00 $2.00 Insurancei'Utilities $0.75 $0.25 RepairMaintenance $1 .52 $ 1.52 Administrative Expenses $0.85 $0.85 Managementflease Commissions $0.75 $0.15 Salaries $0.55 $0.55 Caital Ex ndituresfhnrovenwnt Allowances Other Information IwemnExenseGrowthRate Growth Rate of Income during Constant Growth Period 1st year of Constant Growth Rate Re . uired Rate of Return on Investment Using the information provided, evaluate the feasibility of the project under each scenario. What is the present value of the property, under each scenario, using a discounted cash ow analysis? What is the internal rate of return for the property? Which project scenario would you recommend to management, and why? The analysis should be completed using Excel. Ensure that your Excel spreadsheet is well formatted and easy to follow. The analysis should also include a word document which describes, what you did, and your results. The write up should be no more than 5 double spaced pages. The analysis should include a computation of (a) the effective annual rent, (b) the going-in capitalization rate (R) based on year 1 NO], (c) the terminal capitalization rate at the end of year 10, and (4) the reversion value (REV). Make sure your Excel model is designed and built by you and the written document is your work. The sharing or plagiarizing of work will result in a zero grade for all individuals involved. The project should be turned inby Sunday, November 15, 2020 at 11:59 pm. It should be submitted through the CANVAS platform. Remember, you must submit an Excel le showing your analysis, and a Word document describing your analysis and results
