MARINE TOWER RENOVATION PROJECT Harvard Case Solution & Analysis



            This report attempts to perform the analysis for the Marine Tower Office Building renovation on the basis of two different loan alternatives. The before tax internal rate of return and the after tax internal rate of return would be computed to perform the analysis and both the financing alternatives would also be compared in terms of their riskiness which is their leverage. Finally, a recommendation would be made on the best financing alternative among the two loan options.


            The analysis has been performed by first computing the before tax internal rate of return and the after tax rate of return for the office building renovation and then comparing it if the renovation was not undertaken and the existing loan was being utilized for the operating expenses of the property.

BTIRRe & ATIRRe under Loan Alternative 1

            First of all, in order to compute the before and after tax internal rates of return, the before tax and after tax cash flows have been computed for the five year holding period. The loan amortization schedule for the existing loan has been generated and the loan amortization schedule for loan alternative 1 has also been calculated. This loan amount is calculated by adding the existing loan balance at the end of year 2 with the 75% of the total renovation costs of $ 200,000. The total loan balance is $ 729104 which is equal to a loan to value ratio of 89% approximately. The remaining mortgage term is 18 years and the holding period is 5 years.

            Interest under existing loan has been deducted if there is no renovation and interest under loan 1 has been deducted if there is renovation. Constant depreciation amount of $ 15385 has also been deducted in each year and then the before and after tax cash flows have been computed. Using these cash flows and the equity investment, the rates of return have been calculated. The BTIRRe and ATIRRe under the existing loan are 19.04% and 11.68% respectively however, under loan option 1 these are 51.13% and 40.29% respectively. The incremental ATIRRe is approximately 28.62%. Therefore, here it could be seen that the new loan and renovation has actually increased the rates of return for the Rambo......................

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