Real Estate Finance - Case Study Example

Real E Finance In real e venture, an individual undertake several considerations before making decision on selling property. The first question is based on the near future of the market conditions whether it will improve or not. In addition, it is critical to evaluate whether, there are other available options of disposing properties. For example, through the auctioneering process that could offer a good bid. Decisions will be made on whether there is a possibility of the buyers backing up for a second time as compared to what happened initially.

Internal rate of return (IRR) = CFo + CF1/ (1 + IRR)1+ CF2/ (1 + IRR)2 + ---+ CFn/(1+IRR)n = 0IRR if nothing is done= $(100million) + $5M/(1+IRR)1+ $10M/(1+IRR)2+ $15M/(1+IRR)3+ $20M/(1+IRR)4+$25M(1+IRR)5+$30(1+IRR)6+$35(1+IRR)7+$40(1+IRR)8+$45/(1+IRR)9+$50/(1+IRR)10=0 Through trial and error method(Helfert, 2005).$(5+10+15+20+25+30+35+40+45+50) million= $275Million/10yrs= $27.5millionAverage payback period=$100million/$27.5million= 3.6364years in PVIFA table the discounting is 15% as it is close to 0.3624. Year(t)Cash Inflow($million)PVIF15%,tPVIF*Cash Inflow150.86964.32100.75617.5613150.65759.86254200.571711.4345250.497212.436300.42312.977350.375913.168400.326913.089450.284312.7910500.247212.36PVIF of cash inflows109.

948NPV= $109.948- $100 = $9.948As it gives a positive value of $9.948million. It is critical to add up 2% to 15% to come up with a negative Net present value.Lets try 17%Year(t)Cash Inflow($million)PVIF15%,tPVIF*Cash Inflow150.85474.27352100.73057.3053150.62449.3664200.533710.6745250.456111.40256300.389811.6947350.333111.65858400.284811.3929450.243410.95310500.208010.4PVIF of cash inflows99.1185 Net Present Value= $99.1185- $100 = $ =$(0.8815)millionTherefore, the most appropriate IRR using the trial and error method is 17% because it gives a negative value as compared to 15% which gives a positive net present value.

The Required additional equity is the $10m in interest payments owed to Usurious Financial. This will increase the initial cash outlay to $110million ($100+$10).$110/$27.5= 4 years =from the PVIFA table the discount rate= 19% because it is close to 0.3957.Year(t)Cash Inflow($million)PVIF19%,tPVIF*Cash Inflow150.8404.22100.7067.063150.5938.8954200.4999.985250.41910.4756300.35210.567350.295910.35658400.24879.9489450.2099.40510500.17568.78PVIF of cash inflows89.6595Net present value= $89.6595-$110=$(10.3405) which is less than zero.

Therefore, when the shareholders invest the additional amount, the IRR will increase to 19%If the interest rate r=9%, Assuming shareholders do not contribute additional capital.NPV=$(100million)+$5M/(1+r)1+$10M/(1+r)2+$15M/(1+r)3+$20M/(1+r)4+$25M(1+r)5+$30(1+r)6+$35(1+r)7+$40(1+r)8+$45/(1+r)9+$50/(1+r)10=0 Year(t)Cash Inflow($million)PVIF9%,tPVIF*Cash Inflow150.91744.5872100.84178.4173150.772111.58154200.708414.1685250.649916.24756300.596317.8897350.547019.1458400.501920.0769450.460420.71810500.422421.12PVIF of cash inflows153.

949The IRR will remain at 15% because the initial cash outlay will not change.Capital budgeting uses internal rate of return to come up with a decision on the viability of the project. Because the above project investment, will take time to mature (Helfert 255). It would be suitable enough for the IRR calculations to be based on the returns that the initial investment will make. This will allow, the use of present value of the future investment to determine how long it will take to give returns thus, attain maturity period.

More significantly, the incremental results will indicate the level of profitability of investing in the project. Work CitedHelfert, Erich. Financial analysis : tools and techniques : a guide for managers. New York: McGraw-Hill, 2001. Print.