Investment Appraisal

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CAPITAL BUDGETING ANALYSIS REPORT TO LAM REGARDING POTENTIAL INVESTMENT OPPORTUNITY APARTMENT COMPLEX 830 S. Westlake Avenue Los Angeles CA 90057 Presented by: GRETA BANYTE April 14th, 2010 Well maintained apartment building, built in 1964, located at 830 S. Westlake Avenue, in Los Angeles, is listed at the price of $5,700,000. The building is close to the 10, 110 and 101 freeways, as well as it is 1 mile from Mid Wilshire, 1.2 miles from Downtown, 2.6 miles from Dodger Stadium, and 7.5 miles from Hollywood. The size of the lot is 30,013 square foot. This 34,722 square foot apartment building includes 60 units: • 4 bachelor units, • 25 singles, and • 31 one bedroom, one bathroom (1+1)…show more content…
LAM will forgo the opportunity offered by the owner of the apartment building for a “New First Loan” at 6% interest that is due in 2013, and look for other sources of funds. Down-payment of $1,425,000 (25% of the total listed property price), of which: • $570,000 will be acquired from the Japanese investor who will be paid 5% annual dividend, and • $855,000 will be paid by LAM in cash. Loan of $4,275,000 (75% of the total listed property price): • Loan from US bank: $2,137,500: o Rate: 5% o Term: 30 years o Monthly Payment: $11,475 • Loan from Japanese bank: $2,137,500 (or ¥200,174,951): o Rate: 3% o Term: 30 years o Monthly Payment: ¥843,966 The corporate tax rate will be 34% over the next 7 years. The Apartment building will be sold for $6,270,000 after 7 years (increase of 10% from the price of $5,700,000 paid in 2010). Capital gain tax rate will be 34% (note: in California corporate capital gains are taxed the same as regular income). Exchange rate: US dollar will appreciate by 1% against Japanese Yen in the beginning of 2011 (as of April 10th 2010, the exchange rate: 1USD = 93.6491 Japanese Yen) 2010 2011 Exchange rate: per 1 USD 93.65¥ 94.59¥ The par value of preferred stock will remain unchanged over the next 7 years. Thus, the annual dividend received by Japanese investor will equal to $28,500 (= $570,000
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