RED501 Historical Context Of Catholic Teaching

In this report, discussion is made about the profitability and other relevant financial factors that are required for the financial decision-making. In addition to the financial sustainability the viability of the products are required to be evaluated for determining the profitability and the other relevant factors. In the given case, the Small Apartment Complex at the East Edge of Sam Hughes Neighbourhood Tucson is evaluated.

Assumption/Case analysis:

            The project required an investment worth $ 1256309. This is a residential complex and will be let out on rental basis. The complex holds 2 BHK and 3 BHK rooms of 20 units and 5 units respectively. The rent per month is $ 935 and $ 1250 respectable for the two-bed room house and the 3 bed room houses. The annual rental income amounts to $ 299400. In addition to that, the rental property remains vacant for the 8% on the overall rent out period. Therefore, the net rental income remains lower than the annual projected rent (Mera and Renaud 2016). The net rental income for the in the year 1 is ascertained to be $ 275448. In addition to that, the cost and the rental charges are assumed to be increased by 2% on the total amounts, this will affect the profitability and the adaptability.

With the respective and reliable income sources, some operating expenses regarded as OPEX and some capital expenditure (CAPEX) is required to be paid off. The OPEX or the operating expenses consist of Re Taxes, insurance, interracial expenses exterior expenses, property management cost and others which re incurred on monthly basis. Further, the reserve fund is made to ascertain to be 99000 per month (Rouanet and Halbert 2016).

The investors of the project are demanding the return for their investment in this project of 8% on the total investments. The said property is the mixture of the equity and dent investment. Therefore, the firm needs to pay of an amount out of its profit for the debt maintenance. in an addition to that the monthly debt maintained cost amounts to be $ 5786 monthly, therefore the annual expenditure for the debts maintained is calculated to be $ 69433. For the evaluation process of the current investment plan in this summative assessment varies calculation are made to ascertained the profitability of the business proposal that are discussed here under (Cerutti et al. 2017).

Annual income computation:

In the given case, the calculation for the business income is conducted annually. The draft is prepared for understanding and for the decision-making or evaluating purpose. For the later years, the values are added with the inflation of 2%. In the calculation it has been ascertained that the business is able to earn profits after deducting all the relevant expenditure amounts to be $ 20314. The income statement will be helpful for various reasons such and ascertaining the annual income of the business and the overall profitability of the business, and for the calculation of the NPV and the IRR (Schwartz 2014).

Annual Income
particulars	Amount
Gross Rent	$299,400.00
Less: Vacancy	23952
Net Rental Income	275448
Less: Expenses
Annual Open	$86,700
Annual Capex	$99,000
Annual Debt Service	$69,433.53
Total Expense	$255,134
Net Income	$20,314

NPV:

 The NPV is the measure of the profitability of the business as this the calculation of the present value of the future income when the discounting factor is the desired return of the investors. The resultant figure is compared with the investment in the initial year. If the NPV amount is zero or more than that then it can be said that, the investment proposal is profitable. That means it is worthy to make investment, as the investor will get the desire rate of return. In the given case, the discounting factor is regarded as 8 %, which is the required rate of return or the discounting factor (Aalbers 2016). The NPV calculation indicates that the project is not profitable as the  resulted NPV is negative. The NPV of the project is -$1161709. This means the investors will gain more than the desired returns.

Project return/ NPV
Particulars	YEAR 0	1	2	3	4	5
Cash Flow	-$1,256,309.00	$275,448.00	$280,956.96	$286,576.10	$292,307.62	$298,153.77
LESS:
OPEX		$86,700.00	$88,434.00	$90,202.68	$92,006.73	$93,846.87
Capex		$99,000.00	$100,980.00	$102,999.60	$105,059.59	$107,160.78
Debt Service Coverage		$69,433.53	$69,433.53	$69,433.53	$69,433.53	$69,433.53
Net Cash Flow		$20,314.47	$22,109.43	$23,940.29	$25,807.77	$27,712.59
Discounting Factor		$0.93	$0.86	$0.79	$0.74	$0.68
Discounted Cash Flow		$18,809.70	$18,955.27	$19,004.58	$18,969.48	$18,860.73
NPV	-$1,161,709.25

Furthermore, as the investment is availing the debt option then another valuable ratio that is calculated is the debt service coverage ratio. The debt service is calculated by dividing the total debt cost by the annual income. In the given case, the resultant figure is 0.25. This means one fourth of the revenue is paid off for the debts; this is very high and is not a positive sign for the entity (Cerutti et al. 2017).

Debt Service Coverage
Debt Cost	$69,433.53
Net Income	275448
Debt Service Coverage	0.25

Another investment decision-making assumption is the debt equity ratio. This ratio provides a detailed knowledge about the solvency situation of the company. In the given case, the debt to Equity is 3 times which more than the generally accepted standard (Squires and Heurkens 2014).

Debt Leverage
Equity	$314,077
Debt	$942,232
Debt Leverage	3

In the given case, the IRR or the internal rate of return is calculated for understanding the percentage of the profitability of the investment appraisal. The IRR calculated with two assumptions where the advantage is the variants. It can be seen that the result is in negative (Leigh and Blakely 2016).

Leverages IRR
Particulars	0	1	2	3	4	5
Cash Flow	-$1,256,309	$275,448	280957	286576	292308	298154
LESS:
OPEX		$86,700	88434	90203	92007	93847
Capex		$99,000	100980	103000	105060	107161
Debt Service Coverage		$69,434	$69,434	$69,434	$69,434	$69,434
Net Cash Flow		$20,314	$22,109	$23,940	$25,808	$27,713
Discounting Factor		0.925925926	0.857338820	0.793832241	0.735029853	0.680583197
Discounted Cash Flow	-$1,256,309	18810	18955	19005	18969	18861
Irr	-51%

 

Unlevered IRR
Particulars	0	1	2	3	4	5
Leverages IRR
Cash Flow	-$1,256,309	$275,448	280957	286576	292308	298154
LESS:
OPEX		$86,700	88434	90203	92007	93847
Capex		$99,000	100980	103000	105060	107161
Net Cash Flow		$89,748	$91,543	$93,374	$95,241	$97,146
Discounting Factor		0.925925926	0.857338820	0.793832241	0.735029853	0.680583197
Discounted Cash Flow	-$1,256,309	83100	78483	74123	70005	66116
IRR	-31%

Conclusion

 In the given case the profitability of the project is negative and it is not worth investing. The only matter of concern is that the decision is the IRR effect. Irrespective of the fact, the debt service coverage and the debt to equity are very high as compared to the normal standards.

Reference

Aalbers, M.B., 2016. The financialization of home and the mortgage market crisis. In The Financialization of Housing(pp. 40-63). Routledge.

Cerutti, E., Dagher, J. and Dell'Ariccia, G., 2017. Housing finance and real-estate booms: a cross-country perspective. Journal of Housing Economics, 38, pp.1-13.

Cerutti, E., Dagher, J. and Dell'Ariccia, G., 2017. Housing finance and real-estate booms: a cross-country perspective. Journal of Housing Economics, 38, pp.1-13.

Leigh, N.G. and Blakely, E.J., 2016. Planning local economic development: Theory and practice. SAGE publications.

Mera, K. and Renaud, B., 2016. Asia's financial crisis and the role of real estate. Routledge.

Rouanet, H. and Halbert, L., 2016. Leveraging finance capital: Urban change and self-empowerment of real estate developers in India. Urban Studies, 53(7), pp.1401-1423.

Schwartz, A.F., 2014. Housing policy in the United States. Routledge.

Squires, G. and Heurkens, E. eds., 2014. International approaches to real estate development. Routledge.