Reference no: EM132977010

Suppose you own a successful real-estate flipping business, where you buy properties, fix them up and resell them. You usually flip houses, but occasionally have done commercial properties as well. The city council of your local area recently offered to give you (for free and without taxes) a derelict factory downtown. If you renovate the building into a mixed-use apartment and retail center, they will allow you to keep all of the profits when you sell the building, since they are just happy to have the building revitalized. You will not get the building if you do not agree to renovate it. Your contractor estimates that you would need to pay one million dollars right now, but that that $1 mil will cover all of the costs of the project. One million dollars is, however, almost all of the money you have to invest in flips, so you would only be able to take on one house at a time while you redo the factory, instead of the five or six you usually are flipping at any given time. You believe that the final sale of the building will bring you a net payout of $1,500,000. The project is quite large and will take some time to complete, so you estimate you will sell the building after 5 years. Your investment adviser lets you know that she believes you could make 5% each year by investing your money with very low risk in bonds and the stock market. You also know you can continue to operate in your usual manner and have several other options on the table as short-term flips. Should you take on the project? (Hint: Net present value is certainly one element here, and should be discussed, but what else might matter to you in this situation that NPV doesn't take into account?)