Can you please go over the steps on the work problem? This is all the costs, the
ID: 2818760 • Letter: C
Question
Can you please go over the steps on the work problem? This is all the costs, the TVM and estimate an annual return (IRR) for this type of investment. I want to MAP the cash flows. Thank you
You have the opportunity to buy a piece of land with your brother-in-law, Joseph Wheeler Dealer. The land can be purchased for $1,500,000 and Joseph is 100% positive that it can be sold for $2,250,000 in seven years. In fact, he will guarantee this sale price (assume the $2,250,000 is actually achieved).
As he says, "this is a no-brainer 50% return." What do you think the actual returns will be? The property is in Miami-Dade County Florida and needs to be fenced. You might also need liability insurance. You can pay cash or finance the project (easier to model a cash transaction).
The cleanest assumption is to assume no debt. (There are no "tricks' to this, you just need to an investment analysis and think about all fees, income and costs associated with transaction). Do you have all the holding costs? Probably the best way to do this is with a short excel program. This requires TVM calculations! Is this a 50% return? Or is that golf club accounting.
Explanation / Answer
Concept
Time Value Of money .
Value of $1 today DIffers from Value of $1 after 1 year . this is due to the fact of time value or compounding or interest rate factor or opportunity cost
IRR
Internal Rate of Return . the Rate at which inital cash outflow is equal to present value of future cash inflow or inflows ( can be taken as Discounting rate)
solution
solved excluding the charges for trancsaction , insurance charges
Inital cash Outflow = $1500000
cash Outflow = $2250000
using present value formula
1500000=2250000 / (1+IRR)7
assuming IRR= 8% discounted cash flow factor = 0.583 PV of cashflow = 0.583*2250000 =1311750
Assuming IRR=5% discounted cash floe factor = 0.710 Pv of cashfloe = 0.710*2250000 = 1597500
by solving these two I.E (0.08-0.05) =0.03
=(1597500-1500000)/ (1597500-1311750)
=0.03/285750 =0.00000010498*97500 =0.01023555
my IRR =0.05+0.010233
IRR =6.010233%
if i invest 1500000$ today and if the discount rate is 6.010233% p.annum then my cash flow will be 2250000$ at he end of 7th year