Lee Development Co. has found a site that it believes will support 75 homesites. The company also believes that the land can be purchased for $225,000 while direct development costs will run an additional $775,000. The Last National Bank of Texas will underwrite 100 percent of the improvements plus the interest carry. The loan would be made at 13 percent interest with a 3 percent loan origination fee. Lee believes that the development will sell faster with two types of parcels, standard and deluxe, with the standard parcel comprising 57 of the total parcels. Lee’s marketing staff believes that the deluxe sites can be sold for $24,000 while the standard sites should bring $13,500. Lee estimates that the direct cost draws will be taken down in four equal amounts during months 1 to 4. Other up-front fees include closing costs of $10,000 and a 3 percent loan fee (not covered by the loan). Lee’s sales staff supervisor assures him that she can generate sales activity starting in the fourth month that will result in the sale of five standard parcels per month and four deluxe parcels per month for three months. For the next six months, activity should be seven standard parcels per month and only one deluxe parcel per month. The Last National Bank wants its money out of the project early and wants Lee to agree to a release price per parcel that will result in the loan being repaid at a rate 25 percent faster than sales revenue is expected to be earned. Other costs to consider include sales expense (paid quarterly on 5 percent of the sales price of parcels sold during the quarter), administrative costs of $11,000 per quarter, and property taxes of $7,000. None of these latter items are to be funded in the loan.

a. Develop a total monthly sales schedule for Lee. What will be Lee’s total revenue? How many months will it take Lee to fully repay the loan?

b. What will be the total interest carry funded in the loan amount? What will be the release price for each type of lot? Compute the loan repayment schedule. What will be Lee’s total cash payments to the Last National Bank?

c. What will Lee’s total equity requirement be? Should Lee undertake this project if its required return on equity is 18 percent? (Hint: Do a cash flow analysis on a quarterly basis for the life of the project.) What will be the IRR on the project?