Analysis

The cash flow is estimated to grow at 3% annually, this property has the before tax cash flow of 250,000 dollars in the first year, however the tax payable is 10,000 with the tax rate of 10%, the after tax cash flow accounts to 73,583 with the taxable income of 83,583 dollars.

The purchase price of this property is 11 million dollars with the amortization of 7 million dollar and remaining 4 million dollars paid as an equity to the seller of that property.

The sales price of this property is estimated at 14 million dollars with the remaining capital gain of 2.4 million dollars.

The NPV of this property is estimated at 4,266,000 based on the free cash flow of 10 years. The discount rate is mentioned in the case 10% and based on that, we got that NPV.

Based on the 10 year cash flows, the IRR is estimated at 11%. The IRR of this property is more than 900 stony walk property.

The Flower Building

Introduction

This property is under construction in Arlington, Virginia. The purchase price of this property is estimatedat 27.5 million dollars.Broker is sure that he can arrange a 10 year 21 million dollars for this property with 4.5% interest rate. On this property, the owner will be able to depreciate it 39 years using the straight line depreciation method.

Analysis

The cash flow is estimated to grow at 3% annually, this property has the before tax cash flow of 1.719 million dollars in the first year, however the tax payable is 146,114 with the tax rate of 10%, the after tax cash flow accounts to 1.315 million dollars with the taxable income of 1.461 million dollars.

The purchase price of this property is 27.5 million dollars with the amortization of 7 million dollar and remaining 20.5 million dollars paid as an equity to the seller of that property.

The sales price of this property is estimated at 34.5 million dollars with the remaining capital gain of 3.20 million dollars.

The NPV of this property is estimated at 18.219 million dollars based on the free cash flow of 10 years. The discount rate is mentioned in the case 10% and based on that information, we got that NPV.

Based on the 10 year cash flows, the IRR is estimated at 8%. This had been a better option for DeRights to make investment. It has the highest net present value.

Recommendation

From above analysis, we can conclude that, property in Virginia (Flower Building) has the potential to generate the high cash flows as compare to other properties. It has the highest capital gains on selling the property at any time.Therefore, the results of financial analysis clearly show that only this property that is Fowler Building should be given the highest priority of investment to make an “Arm’s Length Transaction” between both the buyer and seller. Moreover, the outcome that would be achieved would be suitable for both parties when performing the deal.

It has the highest NPV of 18.219 million dollars based on the 10 year cash flows. (See Exhibit 1)..............................

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