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Calculate Total Cost of Development and Net Income

Calculate total cost of the development

Proposal 1

Particulars

Amount(In million)

Land acquisition costs

70

Demolition Estimate

0.8

Planning and Design cost

3.5

Landscaping and external work

0.5

Cost of design and construction

350

Cost of development

0.5

Total

425.3

Proposal 2

Particulars

Amount(In million)

Land acquisition costs

70

Demolition Estimate

0.8

Planning and Design cost

4.5

Landscaping and external work

0.5

Cost of design and construction

375

Cost of development

0.5

Total

451.3

Activities

Time duration

Market research

1 month

Data collection

2 month

Planning and design

6 months

Demolition

3 months

Construction

20 months

Landscaping and external work

6 month

Proposal 2

Particulars

Amount

Cash inflow

Sales

Office lettable

27.5

Retail lettable

2.5

Flat

4.56

Total sales

34.56

Amount recoverable

Office lettable

0.25

Retail lettable

0.025

Total recoverable amount

0.275

Total cash inflow

34.84

Cash outflow

Agent commission

0.50985

Overhead costs

10.659

Contingency costs

17.765

Office lettable

8

Retail lettable

0.8

Total outgoings

8.8

Total cash outflow

37.73

Net cash flow

-2.90

Proposal 1

Particulars

Amount

Cash inflow

Sales

Office lettable

41.25

Retail lettable

2.5

Total sales

43.75

Amount recoverable

Office lettable

0.375

Retail lettable

0.025

Total recoverable amount

0.4

Total cash inflow

44.15

Cash outflow

Agent commission

0.811125

Overhead costs

11.439

Contingency costs

19.065

Office lettable

8

Retail lettable

0.8

Total outgoings

8.8

Total cash outflow

40.12

Net cash flow

4.03

 Estimate the net income on completion of project

Proposal 2

Particulars

Amount

Sales

Office lettable

27.5

Retail lettable

2.5

Flat

4.56

Total sales

34.56

Amount recoverable

Office lettable

0.25

Retail lettable

0.025

Total recoverable amount

0.275

Total income

34.84

Expenses

Office lettable

8

Retail lettable

0.8

Total outgoings

8.8

Agent commission

0.640742

Payment

40% of payment

28.84

60% of payment

44.52

Total payment

73.36

Total expenses

82.80074

Net loss

-47.97

Proposal 1

Particulars

Amount

Sales

Office lettable

41.25

Retail lettable

2.5

Total sales

43.75

Amount recoverable

Office lettable

0.375

Retail lettable

0.025

Total recoverable amount

0.4

Total income

44.15

Expenses

Office lettable

12

Retail lettable

0.8

Total outgoings

12.8

Agent commission

0.811125

Payment

40% of payment

28.84

60% of payment

44.52

Total payment

73.36

Total expenses

86.97113

Net loss

-42.82

 Calculate the following:

Total development cost

Proposal1

Particulars

Amount(In million)

Land acquisition costs

70

Demolition Estimate

0.8

Planning and Design cost

3.5

Landscaping and external work

0.5

Cost of design and construction

350

Cost of development

0.5

Total

425.3

Proposal 2

Particulars

Amount(In million)

Land acquisition costs

70

Demolition Estimate

0.8

Planning and Design cost

4.5

Landscaping and external work

0.5

Cost of design and construction

375

Cost of development

0.5

Total

451.3

Project finance cost

Proposal 1

Particulars

1

2

3

Demolition estimate

0.8

0.8

0.8

Planning and design

3.5

3.5

3.5

Landscaping and external work

0.5

0.5

0.5

Cost of design and construction

350

350

350

Development costs

0.5

0.5

0.5

Leasing and sales costs

4.375

0

0

Interest

42.636

42.636

42.636

Overhead costs

10.659

10.659

10.659

Contingency costs

17.765

17.765

17.765

Total cash outflow

430.735

426.36

426.36

Particulars

1

2

3

Demolition estimate

0.8

0.8

0.8

Planning and design

4.5

4.5

4.5

Landscaping and external work

0.5

0.5

0.5

Cost of design and construction

375

375

375

Development costs

0.5

0.5

0.5

Leasing and sales costs

5.5685

0

0

Interest

45.756

45.756

45.756

Overhead costs

11.439

11.439

11.439

Contingency costs

19.065

19.065

19.065

Total cash outflow

463.1285

457.56

457.56

 Cost escalation

Proposal 2

Particulars

Amount

Office

1.1

Retail

0.1

Flat

0.1824

Total

1.3824

Particulars

Amount

Office

1.65

Retail

0.1

Total

1.75

 Calculate the initial project development yield on completion of the project

 Calculate the initial project development yield on completion of the project

Proposal 1

Particulars

Amount

Rental income

Office

41.25

Retail

2.5

Total rental income

43.75

Ongoing costs

Office

12

Retail

0.8

Total ongoing costs

12.8

Initial development

30.95

Initial development yield

0.3095

Proposal 2

Particulars

Amount

Rental income

Office

27.5

Retail

2.5

Flat

4.56

Total rental income

34.56

Ongoing costs

Office

8

Retail

0.8

Total ongoing costs

8.8

Initial development

25.76

Initial development yield

0.2576

Calculate the purchase price of purchasing facility

Proposal 1

Particulars

Amount

Land acquisition costs

70

Demolition Estimate

0.8

Planning and Design cost

3.5

Landscaping and external work

0.5

Cost of design and construction

350

Cost of development

0.5

Total costs

425.3

Yield at5%

21.265

Purchase price

446.565

Proposal 2

Particulars

Amount

Land acquisition costs

70

Demolition Estimate

0.8

Planning and Design cost

4.5

Landscaping and external work

0.5

Cost of design and construction

375

Cost of development

0.5

Total

451.3

Yield at 5%

22.565

Purchase price

473.865

 Calculate developer’s profit or loss

Proposal 1

Particulars

Amount

Rental income

Office

41.25

Retail

2.5

Total rental income

43.75

Developer's cost

Overhead's cost

10.659

Contingency costs

17.765

Total developer's cost

28.424

Profit/loss

15.326

Proposal 2

Particulars

Amount

Rental income

Office

27.5

Retail

2.5

Flat

4.56

Total rent

34.56

Developer's cost

Overhead's cost

11.439

Contingency costs

19.065

Total developer's cost

30.504

Profit/loss

4.056

 Generate an Annual net cash flow for John Wiley Pty Ltd for 10 years

Net Annual cash flow

Particulars

1

2

3

4

5

6

7

8

9

10

Cash flow

426.36

447.678

470.0619

493.565

518.2432

544.1554

571.3632

599.9313

629.9279

661.4243

Particulars

1

2

3

4

5

6

7

8

9

10

Cash flow

457.56

480.438

504.4599

529.6829

556.167

583.9754

613.1742

643.8329

676.0245

709.8257

 Determine NPV using 9% discounting rate with base year 2020

Proposal 1

Year

Cash flow

Pv@9%

Present value

0

446.565

1

426.36

0.917431

391.156

2

447.678

0.84168

376.8016

3

470.0619

0.772183

362.974

4

493.565

0.708425

349.6539

5

518.2432

0.649931

336.8226

6

544.1554

0.596267

324.4621

7

571.3632

0.547034

312.5552

8

599.9313

0.501866

301.0853

9

629.9279

0.460428

290.0363

10

661.4243

0.422411

279.3928

Total

3324.94

NPV

2878.375

Proposal 2

Year

Cash flow

Pv@9%

Present value

0

473.865

1

457.56

0.917431

419.7798

2

480.438

0.84168

404.3751

3

504.4599

0.772183

389.5356

4

529.6829

0.708425

375.2407

5

556.167

0.649931

361.4704

6

583.9754

0.596267

348.2054

7

613.1742

0.547034

335.4273

8

643.8329

0.501866

323.118

9

676.0245

0.460428

311.2605

10

709.8257

0.422411

299.8381

Total

3568.251

NPV

3094.386

Calculate Net present value of sale

Particulars

Amount

Pv@9%

Present value of sale

Initial value of sale

883.92

883.92

cash flow of 10th year

900

0.422411

380.1697

NPV

-503.75

Proposal 1

Year

Average profit

0

446.565

1

426.36

2

447.678

3

470.0619

4

493.565

5

518.2432

6

544.1554

7

571.3632

8

599.9313

9

629.9279

10

661.4243

Total

5362.71

Average

536.271

ARR

120%

Proposal 2

Year

Average profit

0

473.865

1

457.56

2

480.438

3

504.4599

4

529.6829

5

556.167

6

583.9754

7

613.1742

8

643.8329

9

676.0245

10

709.8257

Total

5755.141

Average

575.5141

ARR

121%

Proposal 1

Year

Cash flow

0

-456.565

1

426.36

2

447.678

3

470.0619

4

493.565

5

518.2432

6

544.1554

7

571.3632

8

599.9313

9

629.9279

10

661.4243

IRR

98%

Proposal 2

Year

Cash flow

0

-473.865

1

457.56

2

480.438

3

504.4599

4

529.6829

5

556.167

6

583.9754

7

613.1742

8

643.8329

9

676.0245

10

709.8257

IRR

101%

Compare option 1 and 2 and suggest the best suitable option

The financial performance of both the projects such as investment option 1 and 2 has evaluated by using investment appraisal tools and techniques. Net present value method has used to test the feasibility of different options. Net present value method tests the economic performance of an enterprise by determining the profit generated from the different investments in the future within a short span of time (Covrig, McConaughy and Travers, 2016). The most suitable method used by an individual in measuring the future profitability of different investments opportunities. Two of the investment options are tested on different parameters such as net present value method, average rate of return and internal rate of return. Average rate of return is used to measure the efficiency of the investment opportunity that tests the efficiency of the firm by determining the profitability of the business concern. Internal rate of return is the similar concept just like break even concept in which this rate will test the performance of an entity (Tsai, 2016). An investment opportunity that surpasses this rate will generates higher sales and the revenue for an individual. The results of the different economic appraisal techniques, IRR, NPV and ARR are higher in proposal 2 as compared to the other investment option no. 1. Higher test results of the macro-economic tools are higher in option 2 that positively influences an individual (Roy, Rudra and Prasad, 2017). It can be suggested from the evaluation of all the investment options is proposal 2 that generates higher sales and the revenue for the business enterprise.

Generate Annual Net Cash Flow for 10 Years and Determine NPV

Analyze the impact of changing the Debt To Equity Ratio to 80:20 and 50:50

Debt and equity are two important components in an entity that helps in backing up financial support of the business entity. A capital structure has created by including booth debt and equity that makes the best suitable capital structure in improving the financial performance of an entity that helps in getting the desired market objectives within a short span of time (Gotze, Northcott and Schuster, 2016). Frequent changes in the debt to equity ratio will create negative changes for the business that increases the burden of costs due higher debt. 80: 20 ratio states that 80% debt in an entity with 20% equity that is not the suitable option of the investment. This option increases interest costs as even in profit or loss situations, an entity need to pay the interest costs to all the debentures holders, less portion of equity is not enough to compensate the total amount of debt held by the enterprise owner. Higher amount of debt decreases the strength of the business in meeting all the costs incurred by the business concern (Parker and Swanson, 2016). On the another hand, 50:50 debt to equity ratio, is neutral decision in which there is stable position of the business in front of booth internal as well as external stakeholders of the business concern that will not generate enough revenue for the business.

List all risks that influences the development proposal

Risks is treated as one of the important aspects that needs to be consider by an entity before selecting the most suitable project that enhances the overall productivity of the business concern (Fletcher, 2016). Risks are to be identified by the firm at initial stage to chive the desired market aim and targets within a short span of time. While selecting the suitable investments proposals whose efficiency is to be tested by using macroeconomic tools such as NPV and IRR method that tests the feasibility of the project (Nuswandari, 2016). A particular is selected by the firm that generates higher and positive output in lesser time. Three parameters is consider by the firm is time, quality and costs that increases the productivity of the business concern in the future (Hira, 2016). Completing all the tasks in a lesser time will helps an entity in taking sustainable competitive advantage over all the competitors of the business concern. There are various risks incurred by City High-rise complex while analyzing two of the development projects are mention below:

  • Permission of the local an authority of Melbourne as the rules framed by the authority will may increase the rates of land (Robke and et. al., 2016). Without the approval of the authority the firm is not able to purchase the land as these acts as legal evidence in case of any default committed by both the parties in a particular legal contract.
  • Higher price of land is due to changes takes places in the legal fees and commission. Legal fees involves legal agreements is required before purchasing a land as legal contract will bind both the parties to contract. City high-rise faces the problem of increasing the cost of land due to the external market changes takes places in the legal rules of the Melbourne court due to real estate authority (Evans and Porter, 2010).
  • Owner of the land charges higher commission from the business as their aim is to generate higher profit by selling the land on the cost plus profit pricing. Contract rate may get increases as this contract is inclusive of all the legal fees as well as commission charged by the owner from the city High-rise complex.

Compare Option 1 and 2 and Suggest the Best Suitable Option

Identify three key risk areas

There are various risks covered in the evaluation of all the development proposals is mention below:

  • Higher costs is one of the biggest issue faced by the City High-rise complex as higher costs incurred by the firm may get indifferent while selecting an appropriate investment plan (Ehrhardt and Brigham, 2016).
  • Higher inflation rate is another problem that increases the sales price of the land which is beneficial for the owner of a land and not beneficial for the enterprise owner of City High-rise complex as they need to spent more amounts in selecting the best suitable opportunity (Epstein and Buhovac, 2014). In development proposal, the inflation rate is higher as there are two rates that affect the amount spent in the project are 3% and 6%.
  • Higher costs spent in a development proposal as according to the total area of the land purchased by the firm.

Carry out sensitivity and risk analysis on the above mention three areas

After evaluating the risky factors covered in the two different investment opportunities of the business concern. Risk analysis will be performed by the firm that helps in safeguarding the position of an entity as compared to its competitors located in the external business environment (Chong, 2014). Different risk parameters used by an entity by market research through which an entity can generate enough information regarding the financial performance of an enterprise. Through market research, an entity will get enough information about different changes takes places in the external business environment.

List all assumptions at the front of report

There are various assumptions used in the current assignment are mention below:

  • Fluctuating capital structure by changing the composition of a particular capital structure such as debt and equity.
  • Stable inflation rate
  • Inherent risks occurred in each and every investment option out of the two investment option such as proposal 1 and 2. 

Current assignment is all about evaluating the performance of an entity by considering the financial aspects of an entity in selecting the best suitable investment opportunity out of the two proposals (Davies and Drexler, 2010). City High-rise complex is an investment company whose daily business activity is to make investments in different opportunities that generates higher sales and the revenue in the future in strengthening the performance of the business concern. Two proposal has evaluated in the current assignment is related to the office development and another proposal is regarding apartment complex development (Dalt and Coughlin, 2016). Different tools and technique is used to evaluate the monetary performance of an enterprise by using economic appraisal techniques. NPV and Internal rate of return helps in selecting the best suitable option of the two investment proposals that generates higher revenue for the business enterprise. The current report also emphasises on the capital structure option of considering 80:20 and 50:50 combination of both debt and equity in creating a balance in the business in meeting all the objectives within a given span of time. This assignment focuses on both expenditures and sales and the revenue generated by the firm within a short span of time to improve the current performance of the business in the future.

It can be suggested after evaluating the financial performance of an entity that in the current assignment targets two different aspects in analyzing two different investment projects. It helps in comparing different forms of financing by changing the overall structure of the capital structure with two diverse options such as 80:20 and 50:50 proportion of both debt and equity held in a business. By evaluating the two of the projects, proposal 2 has selected as the best suitable project whose efficiency can get increases by using forecasting tool to predict all the external market changes takes places in an entity. Linear regression tool is used to predict the future return from the investments that helps an entity in ensuring its survival as an investment company for longer time period in front of all its competitors exists in the similar industry for more time period. Another aspect of the current aspects is about the changes in the debt and equity ratio which can be improved by using adequate capital structure theory. Modi-gliani miller approach of the capital structure theory has used to increase the overall earnings of the business by decreasing the overall cost incurred in a business entity.

Analyze the Impact of Changing the Debt to Equity Ratio

An entity uses primary as well as secondary research methodology that helps an individual in assessing a different investment options such as proposal 1 and 2 that helps in getting a desired market objectives (Kaplanand Atkinson, 2015). Market research conducted by an enterprise owner to search about different facts and figures about a particular research that targets diverse investments opportunities. A Primary research methodology used by an entity through questionnaires by taking consent and views of all the stakeholders about a certain project that generates higher sales and the revenue within a short span of time.

To

The managing Director

Subject-Analyzing financial performance

This is to inform to the top management of the City High-rise complex company about the financial performance of the firm by analyzing different investments opportunities.

Introduction

Two investment proposals 1 and 2 are evaluated by using NPV, ARR and IRR in testing the feasibility of two of the projects. One proposal is related to office and retail lettable area and another proposal is related to office, retail and flats lettable area.

Methodology

Macro-economic tools are used by an entity owner in measuring the overall performance of two of the projects in facilitating the owner in selecting the most suitable option.

Results

Proposals two has higher values in NPV, ARR and IRR as compared to another proposal 1 to influence the user in considering the suitable project.

Recommendations

It is recommended to the management to adopt MODI-GLIANI miller approach of capital structure to stabilise the earnings of an entity by balancing the two components of debt and equity.

References

Chong, S., 2014. Business process management for SMEs: an exploratory study of implementation factors for the Australian wine industry. Journal of Information Systems and Small Business. 1(1-2). pp.41-58.

Covrig, V., McConaughy, D. L. and Travers, M. A. K., 2016. Two methods to adjust observed control premia for valuation purposes. Business Valuation Review. 35(1). pp.30-37.

DaDalt, O. and Coughlin, J. F., 2016. Managing Financial Well-Being in the Shadow of Alzheimer’s Disease. Public Policy & Aging Report. 26(1). Pp.36-38.

Davies, H. and Drexler, M. 2010. Financial Development, Capital Flows, and Capital Controls. In The Financial Development Report 2010.  Geneva and New York: World Economic Forum. Pp. 31–47.

Ehrhardt, M. and Brigham, E., 2016. Corporate finance: A focused approach. Cengage Learning.

Epstein, M. J. and Buhovac, A. R., 2014. Making sustainability work: Best practices in managing and measuring corporate social, environmental, and economic impacts. Berrett-Koehler Publishers.

Evans, M. and Porter, R., 2010. Real estate financial reporting and accounting. Journal of Property Investment & Finance. 28(5). Pp. 105-111.

Fletcher, F., 2016. Solutions: Business Problem Solving. Routledge.

Gotze, U., Northcott, D. and Schuster, P., 2016.INVESTMENT APPRAISAL. SPRINGER-VERLAG BERLIN AN.

Hira, T. K., 2016. Financial Sustainability and Personal Finance Education. Springer International Publishing.

Kaplan, R. S. and Atkinson, A.  A., 2015. Advanced management accounting. PHI Learning.

Nuswandari, C., 2016. PENGARUH RETURN ON ASSET, EARNING PER SHARE, PRICE EARNING RATIO, DEBT TO EQUITY RATIO, PRICE TO BOOK VALUE TERHADAP HARGA SAHAM PADA PERUSAHAAN INDEKS LQ 45 PERIODE 2010-2014. Students' Journal of Accounting and Banking. 5(1).

Parker, P. D. and Swanson, 2016. Management of pension discount rate and financial health. Journal of Financial Economic Policy. 3(2). Pp.108-114.

Robke, J. T., and et.al., 2016. Visual display of risk-identifying metadata for identity management access requests. U.S. Patent 9,411,963.

Roy, D., Rudra, D. and Prasad, P., 2017. Capital Structure and Capital Budgeting: An Empirical and Analytical Study of the Relationship. Research Bulletin. 42(4). pp.50-60.

Tsai, L.C., 2016. Household Financial Management and Women’s Experiences of Intimate Partner Violence in the Philippines A Study Using Propensity Score Methods. Violence against women. 59(2). Pp.263-279.

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