Calculate weighted cost of capital-initial cost outlay

Assignment Help Financial Management

Reference no: EM13729835

Your firm owns a lot in center city Philadelphia. The purchase price of the lot in 2002 was $350,000 and today its market value is 1.2 million

Your job is to determine which of the following two options would add the most value to the firm.

OPTION 1:

Build an office high rise with 450,000 square feet of office space. The street level will be dedicated to retail.

Expected revenues per square foot of office space is $22

Retail space is expected to rent for $180,000 a year.

The cost of the building is $85 million and will be financed by borrowing $40,000,000 and paying the balance with cash. The cost of debt is 6% and the cost of cash 8%. (The cost of cash is the forgone return from investment). The firm’s tax rate is 30%

OPTION 2:

Lease the land to the developer in exchange for the use of 12,000 square feet of office space

The annual expenses for this option is $10,000 a year

Evaluate the two options over a useful life of 10 years.

Calculate the initial cost outlay of option 1

12,000,000

86,200,000

85,000,000

Calculate the initial cost outlay for option 2

350,000

1,200,000

85,000,000

Calculate the Weighted Cost of Capital (WACC)

6.2%

Calculate the annual revenue expected for option 1

180,000

9,900,000

10,080,000

Calculate the annual benefit expected for option 2

264,000

300,000

2,640,000

Calculate the annual depreciation expense for option 1

2,179,485

8,500,000

10,000,000

Calculate the annual depreciation expense for option 2

120,000

135,000

Calculate the salvage value you would take into consideration for option 1 in year 10

2,179,487

42,500,000

63,205,128

Calculate the salvage value you would take into consideration for option 2 in year 10

1,200,000

30,770,000

10,000,000

For option 1, calculate the operating cash flows for years 2-9

4,900,359

7,079,846

10,080,000

For option 1, calculate the operating cash flow for year 10

43,589,743

50,669,589

70,284,974

For option 2, calculate the operating cash flows for years 2-9

1,841,000

2,630,000

5,000,000

For option 2, calculate the operating cash flow for year 10

3,041,000

3,500,000

3,800,000

Calculate NPV for option 1

-1,679,769

-1,681,617

2,179,487

Calculate NPV for option 2

11,911,969

14,523,000

15,556,020

Which option should you choose?

Option 1

Option 2

Reference no: EM13729835

Questions Cloud

Generated by connecting these element in various combination : You are given a 10-mH inductor and 2 capacitors,of 5.0 and 2.0-MF capacitance .list the resonant frequencies that can be generated by connecting these element in various combinations

Explain personal branding plan paper : Personal Branding Plan Paper, Summarizes your background and what makes you unique in a 1-paragraph elevator pitch. Identifies 3 to 4 companies you want to work for, and an explanation as to why

Develop pricing strategies and distribution channels : Develop pricing strategies and distribution channels for products. Develop branding strategies for existing and new products

Identify the independent and dependent variables : Identify the independent and dependent variables.Name the levels in your identified factor.nomial scaleState the within-group degrees of freedom and explain how you calculate it.

Calculate weighted cost of capital-initial cost outlay : Build an office high rise with 450,000 square feet of office space. The street level will be dedicated to retail. Lease the land to the developer in exchange for the use of 12,000 square feet of office space. Calculate the Weighted Cost of Capita. Ca..

What is the difference between ppp and gdp : Briefly define and/or identify the following: What is the difference between PPP and GDP

Correlation analysis - data interpretation : A friend did the (Correlation Analysis - Data Interpretation) for me and I cannot get a hold of him to get the missing output. Can you please redo it and I will increase the amount

What is the probability that the simple random sample : a. What are the mean and the standard deviation of the sample mean? What is the probability distribution for the sample mean? Describe this sampling distribution and draw the graph of this probability distribution with its mean and standard deviation..

Collect information that can be used for forecasting : List three examples of businesses that use some sort of device to electronically collect information that can be used for forecasting. The best examples would be from a workplace or area about which you have some special knowledge.

User Account

All Pages