You have the opportunity to invest in a property development project. The project involves the construction of a number of one and two bedroom apartments. Once constructed you intend to transfer the ownership of the apartments to a different entity that will own them long term and rent them out for long term residential accommodation. The entity doing the construction is called Build Co. and the entity that would hold them long term is called Rent co.
You are trying to decide if this is something you wish to do. You decide to develop a financial model that will help you to figure out the returns you should expect from each of Build Co and Rent Co, what investment is required and how they will be funded. These should be separate models. You can ignore GST and income tax implications.
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Build Co.
The following information will be relevant to the Build Co financial model:
1. Construction of 12 apartments in total, 9 two bedroom and 3 one bedroom apartments
2. Market value on completion of $475,000 for a one bedroom apartment and $625,000 for a two bedroom apartment. The apartments will be sold to Rent Co at market value at the end of the 24 month construction period Finance Assignment Help
3. Land cost $1,575,000. Land is purchased at the outset.
4. Construction time 24 months. Costs incurred evenly cross this period
5. Construction costs:
a. $3,450/metre for a 50m2 one bedroom apartment
b. $3,250/metre for a 71m2 two bedroom apartment
c. $2,500/metre for 96m2 of common areas
d. Consent costs of $140,000
e. Landscaping costs of $150,000
f. Contingency costs of $230,000
g. Legal and subdivision costs of $11,500 per apartment
6. The bank have said they are prepared to fund 70% of the construction costs at 5.75% interest with interest being capitalised to the loan.
7. You have enough equity to put in whatever is required – i.e. what is not funded by the bank. You require a 30% return on your investment.
What is the pre tax weighted average cost of capital? Does this Build Co project have a positive or negative NPV? What is the internal rate of return of this project? Finance Assignment Help
