Question

You bought a piece of land at $2,000,000. You plan to build a 80,000 square foot building at cost of $180 per square foot, all inclusive, in addition to land cost. The completed building is expected to generate a monthly net of $2.10 per square foot per month for year 1 and the rent will increase at 4% per year. The operating expenses will be 0.50 per square foot per month for year 1 and increase at 3% per year. At end of year 10, you plan to sell the property for $20,000,000. Assuming you will have an income tax rate of 35% every year and you will take depreciation charge every year based on the IRS allowed schedule of 1/39th of the building cost only per year. Your capital gain tax rate is 20%.
Required:
a. Assuming all cash investment and using a MARR of 8%, what is the Net Present Value of this 10-year investment and what is the IRR?

Answer 1

Answer:

present value 15.826 million

r = 10.42 % = IRR

Explanation:

The problem requires a long solution. I have to use microsoft word for the solution. and its so explanatory on it.

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Answer 2

Answer:

the NPV = -$1,616,741

the IRR = 6.45%

Explanation:

initial investment = $2,000,000 + (80,000 x $180) = $16,400,000

monthly net lease year 1 = 80,000 x $2.10 = $168,000 x 12 = $2,016,000

then it will increase by 4% every year starting year 2

operating costs = $40,000 x 12 = $480,000

then it will increase by 3% every year starting year 2

at the end of year 10, the property should be sold at $20,000,000

in the attached spreadsheet I prepared the yearly cash flows:

the present value of the rental income after taxes = $8,930,394

the present value of the sales proceeds after taxes = $5,852,865

the NPV of the project = -$16,400,000 + $8,930,394 + $5,852,865 = -$1,616,741

the IRR of the project = 6.45%

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