Reference no: EM132044078
Real estate company one-time invest of USD 3,000,000, investment in Miami.
The company will buy commercial real estate space. The expected income is as follows:
Year 1: USD 500,000
Year 2: USD 550,000
Year 3: USD 600,000
Year 4: USD 650,000
Year 5: USD 750,000
The Company is also expecting to have USD 50,000, per year for the next 5 years.
The Company is seeking to purchase the property with 80% leverage and 20% Equity. The cost of capital for leverage is 6%, and cost of equity is 15%.
Based on the information above calculate:
1) Weighted average cost of capital (WACC)
2) Net Present Value of the investment
Investment 2:
The company has another investment opportunity with the same initial capital requirement of USD 3,000,000. This investment will generate USD 650,000 per year for the next five years, and will have USD 75,000, of expenses on a yearly basis for the next 5 years as well. For this investment, the company was able to secure a loan for 65% of the property's value at 5.5% interest rate, and the remaining equity at 15% cost.
Based on the information above calculate:
1) Weighted average cost of capital (WACC)
2) Net Present Value of the investment
If you are the project manager, what property would you recement to invest option 1 or option 2?