Answer 1 Is there and adequate market in Gyor? Are rents adequate to support this development? Gyor was chosen as the primary project site by ECE after careful consideration, under the assumption that its market was sufficient to support the project. Phillip von Wilmowsky base assumption were that Gyor enjoys strong demographic and economic potential, high accessibility and minimal competition. And more specifically, these were the main rational points underlined by von Wilmowsky assessment: • Hungary’s Macroeconomic Condition † As of the case date, Hungary is in the midst of integration with the EU economy. Hungary enjoyed several years of high GDP growth, high employment rates and an appreciating currency. Hungary has still half …show more content…
If I were the Investor, I would want to be compensated to the tune that my risk margin would exceed an IRR of 20%. More specifically, I would demand that ECE two revise its financial estimates of the project. More specifically, lower the building costs significantly and use less aggressive assumptions towards, rent rates and their growth. If the current estimates are not changed, and I would assume the following more conservative assumptions, my investment would not be viable: o A total project investment of 75 million Euros, with a share of 67%. o A cap rate of some 9% (like the one in Budapest). o A rent growth rate of 4%. In order to reach a 20% IRR rate it would not be sufficient for me to receive a 12% preferred interest rate and 67% percent of the upside. In order to improve my IRR I would have to decrease my share of the project (to some 50%). In that case, my offer would not be viable. Answer 3 What factors should you take into consideration to perform sensitivity analysis? How should Phillip take these assumptions into consideration to evaluate the viability of this project? As shown in answer 2, the project has certain viability problems if von Wilmowsky’s assumptions are taken as the base for the financial estimates. I would test the effect of
Moreover, Robert Gates’ estimation of the price increase (2.0%) differs from the information provided in the case (1.7%). This overestimates revenue and thereby FCF. To make better projections for the firms’ FCF, Robert Gates would also have to consider the opportunity cost of alternative investments, the risk exposure throughout the project and operational risks after three years.
If the IRR exceeds the required rate of return (10%), the project should be accepted. Otherwise, it should be rejected.
Evaluating the risks, calculating the probability of success, and factoring in the projected profit from sales will provide a clearer NPV to be compared with other projects in the
Sensitivity analysis begins with the base case (or for this analysis, the “most likely case”) developed using expected values for all uncertain variables. The uncertain variables used in this analysis are procedures per day, average net revenue, and building/equipment salvage value.
We should accept the project because of the positive NPV and high IRR. We will gain $532 million in wealth which is a big money on the scale like this. The company has a bond rating of AA that makes the risk relatively low. So we should definitely say yes.
Changes to the rent roll and vacancy rate as well as the addition of debt cost in the mode yield an npv of $553k. When the initial investment of $400k is taken into consideration this yields a total npv of $153k. This is a positive NPV and therefore the investment is not a losing proposition. However this should be compared to other investments.
7) See Table 1 NPV=42,318.71 IRR = 14% MIRR = 12% Payback period= 2.93 years. Yes the project should be undertaken.
Thus, by year three the company will be making a profit off the investment as year three is 86.73 million profit by 55.35 cost giving the company a 31.38 million dollar surplus. Generally, a period of payback of three year or less is acceptable (Reference Entry) causing this project to be viable based off the payback analysis. Although, these calculations are flawed. The reason for this is because the time value of money is not taken into effect when calculating payback periods which is where IRR can further assist in a more realistic financial picture (Reference Entry).
The analysis of the financial projection in this report is based on the assumptions and the information which you (client) provided. These assumptions and information can be change with the passage of time. The
The question that transcends the project is whether equity investors be sufficiently rewarded to justify there financing interests. The answer to this question is dependent
The positives of this project are that it has the highest NPV, highest total R&P sales, highest population, and highest percent of adults with four plus years of college. First, Whalen Court not only has the highest NPV but they have the greatest opportunity. If sales increase by 10% it would be over $16 million more than the prototype. Second, this projects sales could be by far the greater than the prototypes of any other projects. The 1st and 5th year sales equivalents would be over $52 and $69 million respectively. Compare this to the other projects and they are 10’s of millions more. Third, the Whalen Court project has the highest population at 632,000, which means they have the largest customer pool. Their population is almost three times greater than the second closest project. Lastly, this project has the highest percentage of adults with four plus years of college. This is very important because these are the customers Target is trying to attract the most. Now, there are some negatives of this project as well. First, the investment size is much greater than the typical prototype. It is actually 409% (Appendix 1) more than the prototype. The next closest project is only 31% more, which makes this project very concerning. Next, is the building cost versus the prototype. The project is for a lease of a building and the cost are very high compared to the other projects at over $15 million more than the prototype. Add in the fact that Target usually
The present value of the net incremental cash flows, totaling $5,740K, is added to the present value of the Capital Cost Allowance (CCA) tax shield, provided by the Plant and Equipment of $599K, to arrive at the project’s NPV of $6,339K. (Please refer to Exhibit 4 and 5 for assumptions and detailed NPV calculations.) This high positive NPV means that the project will add a significant amount of value to FMI. In addition, using the incremental cash flows (excluding CCA) generated by the NPV calculation, we calculated the project’s IRR to be 28%. This means that the project will generate a higher rate of return than the company’s cost of capital of 10.05%. This is also a positive indication that the company should undertake the project.
Sensitivity analysis allows a change in one particular variable of simulation. This shows how a project is affected by the change. It shows us what can happen in a project with different input
I will consider the project dates stated in question 3 for this question and also consider that
NPV and IRR: When examining the NPV and the IRR of the Merseyside project, the numbers were very attractive. It had a positive net present value and an IRR above 10 percent. By these numbers, along with others,