127245 Capital Budgeting Assignments Instructions
Recently two small industrial units in Albany were sold in each case the selling price was within $10,000 of the asking price.
You are to assume you are looking to purchase one of these properties to add to your property company. As part of your due diligence you need to undertake a NPV analysis of one of these properties.
The agent Dave Lane from Harcourts Commercial has supplied an information pack for each property please read the information carefully and decide which property you are interested in. This is the only information you will be supplied. Please do not under any circumstance contact Dave Lane, Harcourts, the property owners, the tenants or visit the site of the two properties. If you do so your assignment maybe invalidated and you could receive a zero mark.
Your report should be submitted on Stream and contain a MS Word document and a MS Excel spreadsheet. The word document should refer the reader to your analysis in the spreadsheet with worksheets named to aid in finding relevant information. All calculations should be completed within excel using excel equations to relate to relevant inputs.
Your analysis should be based on a 10 year investment horizon so you will need to estimate a selling price for the property in 10 years. There is no correct answer for this except in the word document you should detail the assumptions made to support your estimation.
I expect the property will be financed with bank debt and you require a deposit of 30% to 50% with monthly repayments and a term of 20 to 30 years. You should research mortgage rates offered by major banks and use an appropriate rate and term. You should decide on these variables and justify your decision.
The properties are both currently rented and you have been supplied some information on the rent paid and expenses (you should note that maintenance and insurance is paid by the body corporate). Consideration should be given as to how this revue and expenses are likely to change over the term of the investment, so please use this as a starting point for your analysis. Expenses relating to the initial property purchase and sale such as valuations and legal and selling expenses should also be estimated and incorporated.
As you own a property company you should consider the tax implications of this investment (though for the purpose of this assignment you can ignore depreciation expense). The tax rate you should apply to taxable income is 28% and you can work on the assumption that any losses made in the investment can be used to offset profits from other parts of the company (effectively giving a tax credit).
Please identify all significant risks in the investment and undertake appropriate analysis.
Any questions you have should be asked on Stream (though if it is something you should already know or find out for yourself I will ignore your question).
Again please respect the instructions not to contact Dave Lane, Harcourts or the property owners or tenants.
Remember there is no one correct answer – only what you can sensibly defend.
Good Luck
it is very important
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