Future Selling Price

Posted: August 27th, 2021

Mini-Case 2

Name

Institutional Affiliation

Mini-Case 2

Question 1- Future Selling Price

Table 1: Financial Statement

Details	Amount in US $
Annual rent	800,000.00
Less: Annual expenses
Routine operating expenses
Sewerage and water (4%)	32,000.00
Insurance	1,117.00
Electricity (1%)	8,000.00
Garbage collection (0.5)	4,000.00
Property tax (15%)	120,000.00
Property management tax (3%)	24,000.00
Maintenance cost (1.25%)	10,000.00
Advertising and marketing	5,000.00
Total routine expenses	204,117.00
Variable expenses
Capital improvements and landscaping (1%)	8,000.00
Budgeting for downtime and vacancies	5,500.00
Pest control services	200.00
Closing cost (2.5% one-time cost)	20,000.00
Total variable expenses	33,700.00
Total annual expense	237,817.00
Annual revenue	562,183.00
Less: Depreciation expense (3.636%)	29,088.00
Salvage value (future home selling price)	533,095.00

Table 2: Working Capital

Working Capital	Amount US $
short-term assets	100,000.00
short-term liabilities	55,000.00
working capital	45,000.00

Question 2- Initial Outlay

Initial Outlay= Capital expenditure + Change in working capital – salvage value+ (salvage value-book value) x (Tax rate)

Fixed Capital Investment	1,000,000.00
Working Capital Investment	45,000.00
Salvage Value	533,095.00
Book Value	100,000.00
Tax Rate (15%)	15%
Initial Outlay	576,869.25

Question 3- 10-Year Cash Flow

	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Operating income	562,183.00	590,292.15	619,806.76	650,797.10	683,336.95	717,503.80	753,378.99	791,047.94	830,600.33	872,130.35
Depreciation	29,088.00	21,463.02	22,536.17	23,662.98	24,846.13	26,088.44	27,392.86	28,762.50	30,200.63	31,710.66
taxes	120,000.00	88,543.82	92,971.01	97,619.56	102,500.54	107,625.57	113,006.85	118,657.19	124,590.05	130,819.55
Working capital	45,000.00	45,000.00	45,000.00	45,000.00	45,000.00	45,000.00	45,000.00	45,000.00	45,000.00	45,000.00
Cash flow	516271	568211.35	594371.918	621840.513	650682.539	680966.666	712764.999	746153.249	781210.912	818021.457

Question 4- Terminal cash flow

Terminal cash flow= After-Tax Proceeds from Disposal ± Change in Working Capital

Tax on disposal
Proceeds	818,021.46
Book value	872,130.35
Tax rate (15%)	15%
	(8,116.33)
After tax disposal
Proceeds	818,021.46
Taxes on disposal	(8,116.33)
	826,137.79
Terminal value	871,137.79

Question 5- IRR

IRR

14%

Question 6-WACC

WACC= weight of debt
Equity fianacing (30%)	300000.00	0.30
Debt financing (70%)	700000.00	0.70
	0.90

Question 7-NPV

NPV	$3,453,068.22

Question 8- Decision rule

The rental property is a good investment since NPV of the project is positive, the WACC is greater than the expected IRR, and the operating cash flow is increasing in the next ten years as indicated by chart 1 below.

Figure 1: Operating Cash Flow