The Dallas Project

The Dallas Project

RE: Purchase price allocation and project analysis, including NPV and IRR

A major real estate corporation purchased the Dallas Project for $33 million in 1991. As outlined on Exhibit 1, the purchase costs of the project should be allocated based on the FDIC's appraised value, which was a $30 million straight-line valuation between the finished lots, unfinished lots, and recreation complex. The $3 million premium paid over the FDIC's appraised value would then be allocated to the finished lots since they were deemed to be the most liquid and resulted in the highest IRR or internal rate of return (83.32%) and NPV or net present value ($125,022 million) for the overall project. Per Exhibit 2, it was expected to take eight years to finish and sell the undeveloped lots. Therefore, the $10 million cost allocation for the unfinished lots, found on Exhibit 1, was allocated evenly to each of the 24,500 unfinished lots as they are sold. This allocation resulted in a purchase price cost allocation of $0.4082 million per unfinished lot. In order to support the expected IRR of 83.32% and NPV of $125,022 million, yearly income statements, cash flow statements, and balance sheets can be found on Exhibit 3 and Exhibit 4.

When determining the appropriate purchase cost allocation, four options were considered (based on variations of the two property appraisals) and then evaluated on their expected NPV and IRR. Exhibit 5 outlines the two appraisals and expected yearly cash flow, NPV, and IRR for each of the four options considered. All four options had a NPV greater than $124,000 million and an IRR greater than 79%. Based on this evaluation, it is safe to say that regardless of how the purchase costs were allocated, the major real estate corporation would receive a rate of return that is no less than 67% higher than the market rate of 12%. Therefore, the Dallas Projects was a slam-dunk or absolute success for the major real estate corporation.