Assignment 1

ABC CORPORATION
RESIDENTIAL REAL ESTATE PROJECT PROPOSAL

Prepared for: Board of Directors, ABC Construction and Leasing Company
Prepared by: CFO, ABC Construction and Leasing Company
Date: July 21, 2010
ABC CORPORATION
TABLE OF CONTENTS
Introduction
Page 3
Project Feasibility Report
Page 4
Assumptions
Page 5
Economic Factors
Page 6
Capital Structure
Page 8
Mortgage Schedule
Page 9
Costs Schedule
Page 11
Depreciation Schedule
Page 12
Sales Revenue Projection

Net Working Capital
Income Statement
Profitability Index
Accounting Rate of Return
Conclusion
Page 13
Page 15
Page 17
Page 24
Page 25
Page 26
ABC CORPORATION
INTRODUCTION
ABC is one of Canadas leasing integrated construction and leasing companies. Founded in
1980, ABC has built an unmatched reputation for market excellence, stability and innovative
leadership in the marketplace. Our company has successfully ventured several real estate and
construction projects over the last three decades. The credit for this success goes to our planning
department for their informed decision making, the sales and marketing departments for
maintaining excellent customer satisfaction standards, our engineers, architects and the entire
ABC team. Together as a family we continue to strive for further success and look forward to
upping the ante in the years to come.
ABC CORPORATION
PROJECT FEASIBILITY REPORT
This report highlights some facts, expected figures and an analysis on a potential real estate
investment opportunity. The project is a 35 year old multistoried residential condo building with
400 apartments. A summary of the positive outcomes for ABC Corporation from this project
would be:
To increase presence and penetrate market share in the real estate market in the Toronto
downtown core
To take advantage of current market condition namely low interest rates and to be able to
generate a steady income stream from this project till eventual sale.
To make a prudent and an informed decision several key factors need to be analyzed in details
such as:
Assumptions
Economic factors
Capital structure
Investment criteria(NPV and IRR)
Accounting rate of return
A detailed analysis of the above mentioned factors follow.
ABC CORPORATION
Assumptions
Following is a list of assumptions that have been established for this project:
Interest rate is 4.50% (Govt. of Canada 5 year Bond yield 2.5% plus Risk Premium 2%)
Tax rate is 30%
Duration for continuing operation is 5 years after which the building has to be listed for
sale.
Weighted Average cost of capital (WACC) method will be used to develop the best
possible mix of debt to equity.

Maximum equity that can be issued is $30 million or 30% of acquisition cost
Rental leases will be for 5 years as opposed to 1 year agreement currently in effect
Capital cost allowance (CCA) rate is 4%
Inflation rate is 1%
ABC CORPORATION
ECONOMIC FACTORS
Competition
Over the last decade several new construction projects have been completed in the Toronto
downtown core. The result of which is a surplus in the amount of condos available for sale.
According to a release by the Globe and mail, builders of these condominium buildings have had
to suffer great amount of losses due to the surplus. The focus is now switching over to renting the
vacant condos till they are eventually sold.
The building which ABC is eyeing has 400 apartments which have been on rent for several
years. The building is close to subway station, universities, shopping malls, grocery stores and
parks which make it attractive venue. Thereby achieving 90-100% utilization on the rental
apartments will not be daunting task for ABCs experienced sales and marketing staff.
The building currently has renters which have annual leases. Since ABC is targeting to sell the
building after 5 years, the plan is to lock in the leases for 5 years which will provide for some
cushion against vacancy losses.
The building has 2 and 3 bedroom apartments (which is mainly 2 bedrooms and a den). The
average rental for similar sized apartments in the downtown area is $2,200. The current price tag
for the monthly rentals at this building is for $2,000. But if the building is renovated, the rent can
be raised to $2,500 per month and also make it attractable for lease.
ABC CORPORATION
RISK FACTORS
Systematic Risks
Systematic risks are risks associated with the entire market. This kind is hard to avoid. Risk item
included under this are:
Interest rates
Inflation
Dollar value
Political condition
Market condition
Non-Systematic Risks
Non-Systematic risks are associated with certain unique factors, such as
Management
Competition
Utilization on the rental apartments
These risks are controllable and ABCs team of professionals is able to manage such risks.
Goals
Maximize sales and market share

Minimize costs
Maximize NPV
Maintain steady earnings growth
These goals will provide for a checklist for several different case scenarios that will be analyzed
in this report.
ABC CORPORATION
CAPITAL STRUCTURE
The capital structure is a mix debt and equity for the amount of funding needed for this project.
To use the best possible combination of debt vs equity, the weighted average cost of capital will
be used. The WACC is the average rate ABC is expected to pay its share holders and debt
holders. Below are different combinations of debt and equity with the best mix highlighted:
Capital Structure 1
Cost of Debt (Risk free rate+ risk premium)
4.50%
Cost of Debt (After-Tax)
3.15%
Cost of Equity
13%
Corporate Tax rate
30%
WACC
6.11%
% of Debt financing
70%
% of Equity financing
30%
% of Debt financing
80%
20%
% of Debt financing
90%
10%
Capital Structure 2
4.50%
3.15%
Cost of Equity
13%
Corporate Tax rate
30%
WACC
5.12%
Capital Structure 3
4.50%
3.15%
Cost of Equity
13%
Corporate Tax rate
30%
WACC
4.14%
Note: Government of Canada Bond (5 year) rate

Risk Premium
= 2.50%
=2%
Cost of Debt (Pre-Tax) =Risk Free Rate+ Risk Premium

Cost of Debt (pre-Tax) = 2.50%+2.00% = 4.50%
= 4.50 %( 1-30%) = 4.50 %( 70%) = 3.15%
ABC CORPORATION
MORTGAGE SCHEDULE
Using the WACC, capital structure 3 will be used for the mortgage, which is 10% equity and
90% debt. Following are the mortgage schedule for ABCs two options, whether or not to
renovate the building? If the building is not renovated, funding needs are $90 million. Equity
will be used for down payment and remaining will be debt financing and the length of the
mortgage will be for 30 years.
Mortgage Payment Schedule-1

Mortgage Schedule if Building Renovated
Scenario-1
Investment Amount
$100,000,000.00
Capital Structure-1
Down payment (30%)
$30,000,000.00
Equity
$30,000,000.00
Mortgage Amount (30 years)
$70,000,000.00
Debt
$70,000,000.00
Interest rate
Monthly payment
4.50%
Funding needed
$100,000,000.00
$354,679.72
Scenario-2
Investment Amount
Capital Structure-2
$100,000,000.00
Down payment (20%)
$20,000,000.00
Equity
$20,000,000.00
$80,000,000.00
Debt
$80,000,000.00
Interest rate
Monthly payment
4.50%
Funding needed
$100,000,000.00
$405,348.25
Scenario-3
Investment Amount
Capital Structure-3
$100,000,000.00
Down payment (10%)
$10,000,000.00
Equity
$10,000,000.00
$90,000,000.00
Debt
$90,000,000.00
Interest rate
Monthly payment
4.50%
Funding needed
$100,000,000.00
$456,016.78
ABC CORPORATION
Mortgage Payment Schedule-2
Mortgage Schedule if Building Not Renovated
Scenario-1
Capital Structure-1
Investment Amount
$90,000,000.00
Down payment (30%)
$27,000,000.00
Equity
$27,000,000.00
$63,000,000.00
Debt
$63,000,000.00
Funding needed
$90,000,000.00
Interest rate
Monthly payment
4.50%
$319,211.75
Scenario-2
Capital Structure-2
Investment Amount
$90,000,000.00
Down payment (20%)
$18,000,000.00
Equity
$18,000,000.00
$72,000,000.00
Debt
$72,000,000.00
Funding needed
$90,000,000.00
Interest rate
Monthly payment
4.50%
$364,813.42
Scenario-3
Capital Structure-3
Investment Amount
$90,000,000.00
Down payment (10%)
$9,000,000.00
Equity
$81,000,000.00
Debt
$81,000,000.00
Funding needed
$90,000,000.00
Interest rate
Monthly payment
4.50%
$9,000,000.00
$410,415.10
10
ABC CORPORATION
Costs Schedule
Following is the best estimates of the total fixed and variable costs that ABC will incur to carry out this
project Costs include:
Fixed Costs
Selling & Admin.
Variable Costs
$2,000.00
Selling & Admin.
$8,000.00
Insurance
$11,000.00
Utilities
$100,000.00
Security
$6,000.00
Total (Monthly)
$108,000.00
Total (Annual)
$1,296,000.00
Cleaning
$5,000.00
Maintaining
$7,000.00
Landscaping
$1,500.00
Total (Monthly)
$32,500.00
Total (Annual)
$390,000.00
Fixed costs are standard costs expected on most real estate. Operations will be run from ABCs central
head office by sales and marketing department along with the accounting department for the
administrative activities (preparing of lease agreements and collection of lease payment). Variable costs
include the cost of utilities for the 400 apartments at $250 per unit per month. Using the above cost
schedule, the total costs for the two different scenarios will be:
Building Renovated
Building Not Renovated
Scenario 1
Scenario 1
Mortgage payment
$354,679.72
Mortgage Payment
$319,211.75
Total Fixed Costs
$4,646,156.64
Total Fixed Costs
$4,220,541.00
Scenario 2
Scenario 2
Mortgage payment
$405,348.25
Mortgage Payment
$364,813.42
Total Fixed Costs
$5,254,179.00
Total Fixed Costs
$4,767,761.04
Scenario 3
Scenario 3
Mortgage payment
$456,016.78
Mortgage Payment
$410,415.10
Total Fixed Costs
$5,862,201.36
Total Fixed Costs
$5,314,981.20
11
ABC CORPORATION
Capital Cost Allowance rate of 4% is used for buildings. Following is the breakdown of the
depreciation expenses using a CCA rate of 4%.
Building Renovated
Year
1
2
3
4
5
Beginning UCC
$ 50,000,000.00
$ 98,000,000.00
$ 94,080,000.00
$ 90,316,800.00
$ 86,704,128.00
$
$
$
$
$
CCA (4%)
2,000,000.00
3,920,000.00
3,763,200.00
3,612,672.00
3,468,165.12
Ending UCC
$ 48,000,000.00
$ 94,080,000.00
$ 90,316,800.00
$ 86,704,128.00
$ 83,235,962.88
$
$
$
$
$
CCA (4%)
1,800,000.00
3,528,000.00
3,386,880.00
3,251,404.80
3,121,348.61
Ending UCC
$ 43,200,000.00
$ 84,672,000.00
$ 81,285,120.00
$ 78,033,715.20
$ 74,912,366.59

Year
1
2
3
4
5
Beginning UCC
$ 45,000,000.00
$ 88,200,000.00
$ 84,672,000.00
$ 81,285,120.00
$ 78,033,715.20
12
ABC CORPORATION
Sales Revenue Projections

Several different scenarios were analyzed for sales projections. Scenarios were classified as:
Best Case- 100% Occupancy
Base Case-
95% Occupancy
Worst Case- 90% Occupancy

If building is renovated in the first year, rent will go up by $500 the following year. It is also
assumed that rent will go up by 1% every year to account for inflationary effects. Following is
the projection if the building is renovated
Building Renovated
year
1
2
3
4
5
# of Units
400
400
400
400
400
Occupancy Rate
100%
100%
100%
100%
100%
Rent per Unit

$
2,000.00
$
2,525.00
$
2,550.25
$
2,575.75
$
2,601.51
Revenue Per Month

$
800,000.00
$
1,010,000.00
$
1,020,100.00
$
1,030,301.00
$
1,040,604.01
Annual revenue
$ 9,600,000.00
$ 12,120,000.00
$ 12,241,200.00
$ 12,363,612.00
$ 12,487,248.12
Rent per Unit

$
2,000.00
$
2,525.00
$
2,550.25
$
2,575.75
$
2,601.51
Revenue Per Month

$
760,000.00
$
959,500.00
$
969,095.00
$
978,785.95
$
988,573.81
Annual revenue
$ 9,120,000.00
$ 11,514,000.00
$ 11,629,140.00
$ 11,745,431.40
$ 11,862,885.71
Rent per Unit

$
2,000.00
$
2,525.00
$
2,550.25
$
2,575.75
Revenue Per Month

$
720,000.00
$
909,000.00
$
918,090.00
$
927,270.90
Annual revenue
$ 8,640,000.00
$ 10,908,000.00
$ 11,017,080.00
$ 11,127,250.80
Base Case- 95% Occupancy

year
1
2
3
4
5
# of Units
400
400
400
400
400
Occupancy Rate
95%
95%
95%
95%
95%

year
1
2
3
4
# of Units
400
400
400
400
Occupancy Rate
90%
90%
90%
90%
13
ABC CORPORATION
5
400
90%
2,601.51
936,543.61
$ 11,238,523.31

year
1
2
3
4
5
# of Units
400
400
400
400
400
Occupancy Rate
100%
100%
100%
100%
100%
Rent per Unit

$
2,000.00
$
2,020.00
$
2,040.20
$
2,060.60
$
2,081.21
Revenue Per Month

$
800,000.00
$
808,000.00
$
816,080.00
$
824,240.80
$
832,483.21
Annual revenue
$ 9,600,000.00
$ 9,696,000.00
$ 9,792,960.00
$ 9,890,889.60
$ 9,989,798.50
Rent per Unit

$
2,000.00
$
2,020.00
$
2,040.20
$
2,060.60
$
2,081.21
Revenue Per Month

$
760,000.00
$
767,600.00
$
775,276.00
$
783,028.76
$
790,859.05
Annual revenue
$ 9,120,000.00
$ 9,211,200.00
$ 9,303,312.00
$ 9,396,345.12
$ 9,490,308.57
Rent per Unit

$
2,000.00
$
2,020.00
$
2,040.20
$
2,060.60
$
2,081.21
Revenue Per Month

$
720,000.00
$
727,200.00
$
734,472.00
$
741,816.72
$
749,234.89
Annual revenue
$ 8,640,000.00
$ 8,726,400.00
$ 8,813,664.00
$ 8,901,800.64
$ 8,990,818.65
Base Case- 95% Occupancy

year
1
2
3
4
5
# of Units
400
400
400
400
400
Occupancy Rate
95%
95%
95%
95%
95%

year
1
2
3
4
5
# of Units
400
400
400
400
400
Occupancy Rate
90%
90%
90%
90%
90%
14
ABC CORPORATION
Net Working Capital

Following schedule will tell us ABCs operating liquidity for the length of the project for both situations:
Building Renovated
Best Case-100% Occupancy
Year
0
1
2
3
4
5
Sales Revenue
$
$
$
$
$
$
9,600,000.00
12,120,000.00
12,241,200.00
12,363,612.00
12,487,248.12
$
$
$
$
$
$
NWC(5% of Sales Revenue)

200,000.00
480,000.00
606,000.00
612,060.00
618,180.60
624,362.41
NWC Increase
$
$ 280,000.00
$ 126,000.00
$
6,060.00
$
6,120.60
$
6,181.81

$
200,000.00
$
456,000.00
$
575,700.00
$
581,457.00
$
587,271.57
$
593,144.29
NWC Increase
$
$ 256,000.00
$ 119,700.00
$
5,757.00
$
5,814.57
$
5,872.72

$
200,000.00
$
432,000.00
$
545,400.00
$
550,854.00
$
556,362.54
$
561,926.17
NWC Increase
$
$ 232,000.00
$ 113,400.00
$
5,454.00
$
5,508.54
$
5,563.63
Base Case-95% Occupancy

Year
0
1
2
3
4
5
Sales Revenue
$
$
$
$
$
$
9,120,000.00
11,514,000.00
11,629,140.00
11,745,431.40
11,862,885.71
Worst Case-90 Occupancy

Year
0
1
2
3
4
5
Sales Revenue
$
$
$
$
$
$
8,640,000.00
10,908,000.00
11,017,080.00
11,127,250.80
11,238,523.31
Notice that initial working capital requirement is $200,000 and then every year its 5% of Sales Revenue
15
ABC CORPORATION

Year
0
1
2
3
4
5
Sales Revenue
$
$
$
$
$
$
9,600,000.00
9,696,000.00
9,792,960.00
9,890,889.60
9,989,798.50

$
200,000.00
$
480,000.00
$
484,800.00
$
489,648.00
$
494,544.48
$
499,489.93
NWC Increase
$
$ 280,000.00
$
4,800.00
$
4,848.00
$
4,896.48
$
4,945.45

$
200,000.00
$
456,000.00
$
460,560.00
$
465,165.60
$
469,817.26
$
474,515.43
NWC Increase
$
$ 256,000.00
$
4,560.00
$
4,605.60
$
4,651.66
$
4,698.17

$
200,000.00
$
432,000.00
$
436,320.00
$
440,683.20
$
445,090.03
$
449,540.93
NWC Increase
$
$ 232,000.00
$
4,320.00
$
4,363.20
$
4,406.83
$
4,450.90

Year
0
1
2
3
4
5
Sales Revenue
$
$
$
$
$
$
9,120,000.00
9,211,200.00
9,303,312.00
9,396,345.12
9,490,308.57
Worst Case-90% Occupancy

Year
0
1
2
3
4
5
Sales Revenue
$
$
$
$
$
$
8,640,000.00
8,726,400.00
8,813,664.00
8,901,800.64
8,990,818.65
16
ABC CORPORATION
Notice that initial working capital requirement is $200,000 and then every year its 5% of Sales Revenue
PROJECTED INCOME STATEMENTS, NPV, AND IRR

Following will present the projected income statements for the 5 years duration. This will give an
in-depth analysis of all the facts taken into consideration so far. Projected income statements are
prepared for both cases with building renovated and not renovated, since the goal is to maximize
sales potential, and generate a steady income stream as well as make the building saleable in the
end.
It will also give us a Net Present Value (NPV), which is series of cash flows, inflows and out
flows. NPV is the present value of future cash flows minus the purchase price. By rule of thumb
a project is not feasible if the NPV is negative.
We will also calculate Internal Rate of Return (IRR) for each scenario with building is renovated
and without renovation. If IRR is equal or greater that the required rate of return (RRQ), we will
accept the project, otherwise reject the project.
17
ABC CORPORATION
BUILDING RENOVATED
Projected Income Statement
Years
1
Net Income
$
9,600,000.00
$
1,296,000.00
$
8,304,000.00
$
5,862,201.36
$
2,000,000.00
$
441,798.64
$
132,539.59
$
309,259.05
$
12,120,000.00
$
1,296,000.00
$
10,824,000.00
$
5,862,201.36
$
3,920,000.00
$
1,041,798.64
$
312,539.59
$
729,259.05
3
$
12,241,200.00
$
1,296,000.00
$
10,945,200.00
$
5,862,201.36
$
3,763,200.00
$
1,319,798.64
$
395,939.59
$
923,859.05
4
$
12,363,612.00
$
1,296,000.00
$
11,067,612.00
$
5,862,201.36
$
3,612,672.00
$
1,592,738.64
$
477,821.59
$
1,114,917.05
5
$
12,487,248.12
$
1,296,000.00
$
11,191,248.12
$
5,862,201.36
$
3,468,165.12
$
1,860,881.64
$
558,264.49
$
1,302,617.15
Projected
Cash
flow(AfterTax)
$
2,309,259.05
$
4,649,259.05
$
4,687,059.05
$
4,727,589.05
$
4,770,782.27
Sales
Revenue
Variable
Cost
C.M
Fixed Cost
CCA
EBIT
Taxes(30%)
Net Present Value (NPV)

PV
Years
0
Initial
Investment
NWC
Injected
cash Inflow
$
(100,000,000.00)
$
(200,000.00)
$
-
$(100,000,000
.00)
$
(280,000.00)
$
2,309,259.05
$
(126,000.00)
$
4,649,259.05
$
(6,060.00)
$
4,687,059.05
$
(6,120.60)
$
4,727,589.05
$
(6,181.81)
$
4,770,782.27
($600,666.30)
$
18,568,828.84
Salvage
NWC
Recovery
$
$
-
$
$
-
$
$
-
$
$
-
$
$
-
$83,235,962.
88
$
624,362.41
$
67,955,269.81
$
509,740.20
$(13,566,827
.45)
Internal Rate of Return (IRR)

0
18
ABC CORPORATION
Net Cash Flow $
$
$
$
$
$
(100,200,000.00 2,029,259.05 4,523,259.05 4,680,999.05 4,721,468.45 88,624,925.75
)
IRR=0.92347%
Years
Net Income
$
7,824,000.00
$
5,862,201.36
$
2,000,000.00
$
(38,201.36)
$
$
(38,201.36)
2
$
11,514,000.0
0
$
1,296,000.00
$
10,218,000.0
0
$
5,862,201.36
$
3,920,000.00
$
435,798.64
$
130,739.59
$
305,059.05
3
$
11,629,140.0
0
$
1,296,000.00
$
10,333,140.0
0
$
5,862,201.36
$
3,763,200.00
$
707,738.64
$
212,321.59
$
495,417.05
4
$
11,745,431.4
0
$
1,296,000.00
$
10,449,431.4
0
$
5,862,201.36
$
3,612,672.00
$
974,558.04
$
292,367.41
$
682,190.63
5
$
11,862,885.7
1
$
1,296,000.00
$
10,566,885.7
1
$
5,862,201.36
$
3,468,165.12
$
1,236,519.23
$
370,955.77
$
865,563.46
Projected Cash
flow(After-Tax)
$
1,961,798.64
$
4,225,059.05
$
4,258,617.05
$
4,294,862.63
$
4,333,728.58
$
9,120,000.00
$
1,296,000.00
Sales Revenue
Variable Cost
C.M
Fixed Cost
CCA
EBIT
Taxes (30%)

Years
0
Initial
Investment
NWC Injected
cash Inflow
$
(100,000,000.00)
$
$
(200,000.00)
(256,000.00)
$
1,961,798.64
PV
3
5
$
(100,000,000.00)
$
(119,700.00)
$
4,225,059.05
$
(5,757.00)
$
4,258,617.05
Salvage
NWC Recovery
$
(5,814.57)
$
4,294,862.63
$
(5,872.72)
$
4,333,728.58
$
83,235,962.88
$
593,144.29
($571,030.53)
$
16,739,959.72
$
67,955,269.81
$
484,253.19
$
(15,391,547.81)
Internal Rate of Return

Net Cash
Flow
0
1
$
$
(100,200,000.00) 1,705,798.64
2
3
4
5
$
$
$
$
4,105,359.05 4,252,860.05 4,289,048.06 88,156,963.03
19
ABC CORPORATION
IRR=0.48751%

Years
1
Net Income
$
8,640,000.00
$
1,296,000.00
$
7,344,000.00
$
5,862,201.36
$
2,000,000.00
$
(518,201.36)
$
$
(518,201.36)
$
10,908,000.00
$
1,296,000.00
$
9,612,000.00
$
5,862,201.36
$
3,920,000.00
$
(170,201.36)
$
$
(170,201.36)
3
$
11,017,080.0
0
$
1,296,000.00
$
9,721,080.00
$
5,862,201.36
$
3,763,200.00
$
95,678.64
$
28,703.59
$
66,975.05
Projected
Cash
flow(After-Tax)
$
1,481,798.64
$
3,749,798.64
$
3,830,175.05
Sales
Revenue
Variable Cost
C.M
Fixed Cost
CCA
EBIT
Taxes (30%)
4
$
11,127,250.8
0
$
1,296,000.00
$
9,831,250.80
$
5,862,201.36
$
3,612,672.00
$
356,377.44
$
106,913.23
$
249,464.21
5
$
11,238,523.3
1
$
1,296,000.00
$
9,942,523.31
$
5,862,201.36
$
3,468,165.12
$
612,156.83
$
183,647.05
$
428,509.78
$
3,862,136.21
$
3,896,674.90

Years
0
Initial
Investment
NWC Injected
cash Inflow
$
(100,000,000.00)
$
$
(200,000.00)
(232,000.00)
$
1,481,798.64
PV
3
5
$
(100,000,000.00)
$
$
(113,400.00) (5,454.00)
$
$
3,749,798.64 3,830,175.05
$
(5,508.54)
$
3,862,136.21
Salvage
NWC Recovery
$
(5,563.63)
$
3,896,674.90
$
83,235,962.88
$
561,926.17
($541,394.76)
$
14,736,738.63
$
67,955,269.81
$
458,766.18
$
(17,390,620.14)
20
ABC CORPORATION
Net Cash
Flow
0
1
2
3
4
5
$
(100,200,000.00 $
$
$
$
$
)
1,249,798.64 3,636,398.64 3,824,721.05 3,856,627.67 87,689,000.32
IRR=0.01194%
21
ABC CORPORATION

Years
Net Income
1
$
9,600,000.00
$
1,296,000.00
$
8,304,000.00
$
5,314,981.20
$
1,800,000.00
$
1,189,018.80
$
356,705.64
$
832,313.16
2
$
9,696,000.00
$
1,296,000.00
$
8,400,000.00
$
5,314,981.20
$
3,528,000.00
$
(442,981.20)
$
$
(442,981.20)
3
$
9,792,960.00
$
1,296,000.00
$
8,496,960.00
$
5,314,981.20
$
3,386,880.00
$
(204,901.20)
$
$
(204,901.20)
4
$
9,890,889.60
$
1,296,000.00
$
8,594,889.60
$
5,314,981.20
$
3,251,404.80
$
28,503.60
$
8,551.08
$
19,952.52
5
$
9,989,798.50
$
1,296,000.00
$
8,693,798.50
$
5,314,981.20
$
3,121,348.61
$
257,468.69
$
77,240.61
$
180,228.08
Projected
Cash
flow(AfterTax)
$
2,632,313.16
$
3,085,018.80
$
3,181,978.80
$
3,271,357.32
$
3,301,576.69
Sales
Revenue
Variable Cost
C.M
Fixed Cost
CCA
EBIT
Taxes(30%)


PV
Years
Initial
Investment
NWC Injected
0
$
(90,000,000.00)
$
(200,000.00)
cash Inflow
5
$
(90,000,000.00)
$
(280,000.00)
$
2,632,313.16
$
(4,800.00)
$
3,085,018.80
$
(4,848.00)
$
3,181,978.80
Salvage
NWC Recovery
$
(4,896.48)
$
3,271,357.32
$
(4,945.45)
$
3,301,576.69
$
74,912,366.59
$
499,489.93
($485,787.89)
$
13,666,478.71
$
61,159,742.83
$
407,792.16
$
(15,251,774.19)

Net Cash
Flow
0
1
$
$
(90,200,000.00) 2,352,313.16
2
3
4
5
$
$
$
$
3,080,218.80 3,177,130.80 3,266,460.84 78,708,487.76
22
ABC CORPORATION
Projected
Income Statement
IRR=0.09081%
Years
EBIT
Taxes
(30%)
Net
Income
1
$
9,120,000.0
0
$
1,296,000.0
0
$
7,824,000.0
0
$
5,314,981.2
0
$
1,800,000.0
0
$
709,018.80
$
212,705.64
$
496,313.16
Projected
Cash
flow(AfterTax)
$
2,296,313.1
6
Sales
Revenue
Variable
Cost
C.M
Fixed Cost
CCA
$
9,211,200.00
$
9,303,312.00
$
9,396,345.12
$
9,490,308.57
$
1,296,000.00
$
1,296,000.00
$
1,296,000.00
$
1,296,000.00
$
7,915,200.00
$
8,007,312.00
$
8,100,345.12
$
8,194,308.57
$
5,314,981.20
$
5,314,981.20
$
5,314,981.20
$
5,314,981.20
$
3,528,000.00
$
(927,781.20)
$
$
(927,781.20)
$
3,386,880.00
$
(694,549.20)
$
$
(694,549.20)
$
3,251,404.80
$
(466,040.88)
$
$
(466,040.88)
$
3,121,348.61
$
(242,021.24)
$
$
(242,021.24)
$
2,600,218.80
$
2,692,330.80
$
2,785,363.92
$
2,879,327.37

PV
Years
Initial
Investment
NWC Injected
0
$
(90,000,000.00)
$
(200,000.00)
cash Inflow
5
$
(90,000,000.00)
$
(256,000.00)
$
2,296,313.16
$
(4,560.00)
$
2,600,218.80
$
(4,605.60)
$
2,692,330.80
Salvage
NWC Recovery
$
(4,651.66)
$
2,785,363.92
$
(4,698.17)
$
2,879,327.37
$
74,912,366.59
$
474,515.43
($461,896.04)
$
11,705,342.13
$
61,159,742.83
$
387,402.55
$
(17,209,408.53)

Net Cash
Flow
0
1
2
3
4
5
$
$
$
$
$
$
(90,200,000.00) 2,040,313.16 2,595,658.80 2,687,725.20 2,780,712.26 78,261,511.22
23
ABC CORPORATION
IRR=-0.43349%

Years
EBIT
Taxes
(30%)
Net
Income
1
$
8,640,000.00
$
1,296,000.00
$
7,344,000.00
$
5,314,981.20
$
1,800,000.00
$
229,018.80
$
68,705.64
$
160,313.16
2
$
8,726,400.00
$
1,296,000.00
$
7,430,400.00
$
5,314,981.20
$
3,528,000.00
$
(1,412,581.20)
$
$
(1,412,581.20)
3
$
8,813,664.00
$
1,296,000.00
$
7,517,664.00
$
5,314,981.20
$
3,386,880.00
$
(1,184,197.20)
$
$
(1,184,197.20)
4
$
8,901,800.64
$
1,296,000.00
$
7,605,800.64
$
5,314,981.20
$
3,251,404.80
$
(960,585.36)
$
$
(960,585.36)
5
$
8,990,818.65
$
1,296,000.00
$
7,694,818.65
$
5,314,981.20
$
3,121,348.61
$
(741,511.16)
$
$
(741,511.16)
Projected
Cash
flow(AfterTax)
$
1,960,313.16
$
2,115,418.80
$
2,202,682.80
$
2,290,819.44
$
2,379,837.45
Sales
Revenue
Variable
Cost
C.M
Fixed Cost
CCA

PV
Years
Initial
Investment
NWC Injected
0
$
(90,000,000.00)
$
(200,000.00)
cash Inflow
5
$
(90,000,000.00)
$
(232,000.00)
$
1,960,313.16
$
(4,320.00)
$
2,115,418.80
$
(4,363.20)
$
2,202,682.80
Salvage
NWC Recovery
$
(4,406.83)
$
2,290,819.44
$
(4,450.90)
$
2,379,837.45
$
74,912,366.59
$
449,540.93
($438,004.18)
$
9,673,874.71
$
61,159,742.83
$
367,012.94
$
(19,237,373.70)

Net Cash
Flow
0
1
2
3
4
5
$
$
$
$
$
$
(90,200,000.00) 1,728,313.16 2,111,098.80 2,198,319.60 2,286,412.61 77,737,294.07
24
ABC CORPORATION
IRR=-0.97953%
25
ABC CORPORATION
PROFITABILITY INDEX
Profitability index is the present value of an investments future cash flows divided by its initial cost, also
known as benefit/cost ratio.
Building Renovated
PV of Total Cash inflow
=$
18,568,828.84
PV of Total Cash outflow
=$ 100,600,666.30
Profitability Index
=$
0.1846

=$
16,739,959.72
=$ 100,571,030.53
Profitability Index
=$
0.1664

=$
14,736,738.63
=$ 100,541,394.76
Profitability Index
=$
0.1466

=$
13,666,478.71
=$ 90,485,787.89
Profitability Index
=$ 0.1510

=$
11,705,342.13
=$
90,461,896.04
Profitability Index
=$
0.1294

=$
9,673,874.71
=$
90,438,004.18
Profitability Index
=$
0.1070
26
ABC CORPORATION
AVERAGE ACCOUNTING RETURN (AAR)

Building Renovated
Average Net Income
=$ 875,982.27
Average Book value
=$ 90,467,378.18
Average Accounting Return (AAR)
=0.968%

Average Net Income
= $ 462,005.77
Average Book value
=$ 90,467,378.18
=0.511%

Average Net Income
=$
11,309.26
Average Book value
=$ 90,467,378.18
=0.013%

Average Net Income
=$
76,922.27
Average Book value
= $ 81,420,640.36
=0.094%

Average Net Income
= $ (366,815.87)
Average Book value
= $ 81,420,640.36
=-0.451%

Average Net Income
= $ (827,712.35)
Average Book value
= $ 81,420,640.36
=-1.017%
27
ABC CORPORATION
CONCLUSION
After careful consideration and looking into all facts presented in this report, there is clear indication that
the project will be failure. There is no strong evidence of any positive returns.
In most cases, the net income from operations is lingering around the breakeven point. There is very little
margin of safety and in most cases, the operations are resulting in a net loss.
The NPV is showing negative numbers which indicates that ABC may be overpaying to enter the project.
The Average accounting return is very low (below 1% even in the Best case scenario).
The project will prove to be an expensive and costly venture in the long run, which will also result in a
negative sign to shareholders of ABCs ability and performance. If the project is taken up and results in a
failure, shareholders may lose confidence in ABC.
Therefore, final recommendations are to abandon the project
28

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ABC CORPORATION

RESIDENTIAL REAL ESTATE PROJECT PROPOSAL

Project Feasibility Report

Sales Revenue Projection

A detailed analysis of the above mentioned factors follow.

possible mix of debt to equity.

Maximize sales and market share

Cost of Debt (After-Tax)

Corporate Tax rate

Cost of Debt (After-Tax)

Corporate Tax rate

Cost of Debt (After-Tax)

Corporate Tax rate

Note: Government of Canada Bond (5 year) rate

Cost of Debt (Pre-Tax) =Risk Free Rate+ Risk Premium

= 4.50 %( 1-30%) = 4.50 %( 70%) = 3.15%

Mortgage Payment Schedule-1

Down payment (30%)

Mortgage Amount (30 years)

Down payment (20%)

Mortgage Amount (30 years)

Down payment (10%)

Mortgage Amount (30 years)

Down payment (30%)

Mortgage Amount (30 years)

Down payment (20%)

Mortgage Amount (30 years)

Down payment (10%)

Mortgage Amount (30 years)

Selling & Admin.

Building Not Renovated

Total Fixed Costs

Total Fixed Costs

Total Fixed Costs

Total Fixed Costs

Total Fixed Costs

Total Fixed Costs

Building Not Renovated

Sales Revenue Projections

Worst Case- 90% Occupancy

Rent per Unit

Revenue Per Month

Rent per Unit

Revenue Per Month

Rent per Unit

Revenue Per Month

Base Case- 95% Occupancy

Worst Case- 90% Occupancy

Building Not Renovated

Rent per Unit

Revenue Per Month

Rent per Unit

Revenue Per Month

Rent per Unit

Revenue Per Month

Base Case- 95% Occupancy

Worst Case- 90% Occupancy

Net Working Capital

NWC(5% of Sales Revenue)

NWC(5% of Sales Revenue)

NWC(5% of Sales Revenue)

Base Case-95% Occupancy

Worst Case-90 Occupancy

Building Not Renovated