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Exhibit 1 gives us an overview of each of the properties, such as the gross purchase price, the depreciable base, estimated sales prices, the amount of the first mortgage and so forth. These assumptions are significant to the calculations used throughout the entire case. In Exhibit 2 we find the first-year project setups. This is important information because we can see how much each real estate property will cost in the first year. This information is also useful in setting up the projected cash flow analysis for each of the four properties.
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Alison Green had the greatest before tax cash flow with $434,306. 3, Ivy Terrace came in second with before tax cash flows of 336,130. 99, 900 Stony Walk came in third with before tax cash flows of $331,148. 84 and The Fowler Building had the least before tax cash flows in its first year with $90,325. 30. Exhibit 3 tells us the purchase and operating comparables.
These comparables give us an easier way to compare purchase and operating variables among the four properties. However, since some of the properties are in square footage and others are in total units, this information is not helpful in comparing all four properties at once. 00 Stony Walk brings in the most average monthly rents with $145,166. 67, and The Fowler Building brings in the least average monthly rents with $106,250. 00. Exhibit 4 tells us the break-even analysis. This is an excellent indicator of risk of the project. Alison Green has the least break-even occupancy with 64. 84%, which is good because it means that the building only needs to be occupied with 64. 84% of people for the owner to Break-even.
On the other hand, The Fowler building has the highest break-even occupancy level with a percentage 85. 92%.
This means that the Fowler Building is a lot more risky than Alison Green. Exhibit 5 tells us the expected cash flows for each property, and through the expected cash flows we find the Net Present Value and the internal rate of return. Alison Green has the highest NPV with $734,294. 38 and The Fowler Building has the lowest NPV with $480,480. 51. These also give us a detailed view of the expected schedule of cash flows over the ten years, which basically tell us what the yearly income will be. This can be helpful when analyzing the yearly distribution of cash flows.
Exhibit 6 tells us the financial analysis of each of the real estate properties. The Fowler Building has the greatest increase in capital value at 41. 49%, while Ivy Terrace has the least increase in capital value with 25. 00%. In year 10, if the clients decide to sell their property the Fowler Building will have had the greatest increase in value. Its sale price in September 2003 is estimated at $9,400,000 and in the 10th year in 2013 the estimated sale price would be $13,300,000. Exhibit 7 tells us the Investment Rankings of each property.
Overall, Alison green has the best rankings compared to the other real estates. Basically both exhibits 6 and 7 gives us a few measures of the rating the properties. Exhibit 8 tells us the breakdown of the internal rate of return, and the results for the breakdown of internal rate of return are summarized in exhibit 9. 900 Stony Walk has the greatest amount of tax shelter at -26. 65%, and The Alison Green has the least tax shelter at -18. 35%. The tax shelter implies for the properties that have a higher tax shelter attribute more of their income to taxes.
The Fowler Building has the greatest Future benefits at 77. 25% and Alison Green has the least future benefits at 44. 37%. Exhibit 10 shows us the breakdown of futures and the total net cash from the sale of each of the properties. Stony Walk has the largest net cash from sale with $8,347,870. 94, and Ivy Terrace has the smallest net cash from sale with $5,138,338. 53. In my sensitivity analysis, I changed the occupancy level for Alison Green from 95% to 96%. Since both John and Judy DeRight have run their own successful businesses, I think they would be able to manage their properties at a higher occupancy level.
When Alison Green had 96% occupancy level, the net present value increased from $734,294. 38 to $793,293. 05. For 900 Stony Walk when I changed occupancy level from 95% to 96% the net present value increased from $699,916. 07 to $771,288. 07. For Ivy Terrace, which was running at a 93% occupancy level, I increased the occupancy level to 94%. By doing this the net present value changed from $493,033. 68 to $546,132. 48. The Fowler Building, which was also running at a 93% occupancy level, was increased to 94%. By increasing the occupancy level the net present value for the fowler building increased from $480,480. 1 to $534,701. 58. In my second sensitivity analysis I lowered the gross purchase price for each of the properties. I strongly believe that I would be able to negotiate a lower purchase price, due to all my experience and negotiating that I have had with my business career. Judy and John came to me for advice because I am the best in the business and I wanted to deliver them only the best results. For Alison Green, instead of $9,600,000 the gross purchase price would now be 9,500,000. Doing this would increase my NPV from$734,294. 38 to $825,200. 62.
For 900 Stony walk the gross purchase price would go down to $11,400,000 from the stated $11,500,000. Doing this would increase NPV from $699,916. 07 to $792,079. 69. For Ivy terrace the gross purchase price would now be $8,300,000 instead of the stated $8,400,000. This will increase the NPV from $493,033. 68 to $710,585. 58. For the Fowler Building the gross purchase price would now become $9,300,000 instead of the stated $9,400,000. This will increase NPV from $480,480. 51 to $572,644. 13. John DeRight sold his business to a medium-sized public company in exchange for $18 million of the company’s stock.
After he sold his company he retired and expected to live comfortably on the $500,000 in dividends paid on the stock plus retirement and other income he had of equal amount. Judy DeRight was president and sole stockholder of a small-sized chemical company that had earned in excess of $1. 6 million before taxes and $1. 1 million after taxes in each of the previous ten years. Over time, she personally had accumulated over $16 million now invested in short-term securities, which she considered could be used for outside investments.
Both cousins felt that real estate would give them the benefits of diversification, protection from inflation, and some tax advantages. After my analysis of the four properties, Alison Green, 900 Stony Walk, Ivy Terrace, and The Fowler Building, I have come to the conclusion that for John DeRight he would do best if he invested in the Alison Green real estate. This is due to the fact that John is entering retirement and he would probably want a property that is less risky, because his future income, as a retiree, is limited. Alison Green is the least risky of the properties, and the safest.
Alison Green has the greatest before tax cash flow at $434,306. 53 in year 1 and by year 10 the before tax cash flow will have increased, due to a 3% yearly increase in cash flow operations, which may be attributed to inflation, to $699,520. 16. Also, for Alison Green the break-even occupancy level is 65. 84%, the lowest percentage compared to other real estates. The 64. 84% indicates that Alison Green only needs to be occupied with 64. 84% of people for John to break-even, so it would take more than a 30% drop in occupancy levels for this property to lose money.
This is a highly unlikely scenario, which makes this a great investment for John DeRight. For Judy DeRight, who has a well-paying job and isn’t looking at the real estate properties as retirement income but more of an investment for now, I think it would be best if Judy invested in the more risky real estate, The Fowler Building. Often risky investments have potentially higher expected payouts than less risky investments. In my opinion, to get far and have a successful business one needs to take a lot of risk, and I think Judy is a risk-taker and would take a real estate that is more risky but also has good long-term possibilities.
Although the Fowler Building, in its first-year projections, appears to be the least valuable to invest in, its future capabilities are impressive and for Judy, who is not a retiree, I think she would be most interested in the long-term possibilities of real estate. In year 10, the fowler building increases the most in capital value with a 41. 49% increase. Its gross purchase price in September 2003 is estimated at $9,400,000 and in the 10th year in 2013 the estimated sales price appreciates to $13,300,000.
The Fowler Building is more risky due to the break-even occupancy level which is 85. 92%. Since Judy does own her own business I think she will have no problem in maintaining the currently projected occupancy level, and may even exceed the occupancy level of 93%. Also I feel that through Judy’s superb management skills she will be able to lower costs and increase rental incomes which will drive down break-even level occupancy. Given my extensive analysis it is clear that the right property for Judy is the Fowler Building, and the right property for John DeRight is Alison Green.
Angus Catwright Case. (2020, Jun 01). Retrieved from https://studymoose.com/angus-catwright-case-new-essay
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