The Dallas Project

The Dallas Project

Question 1: | | | | | | | |

How would you allocate the purchase cost? | | | | | | |

Answer: | | | | | | | |

In this case, we can allocate as per the estimation of the real estate company. Per the real estate company, the estimated price was $100 million. The winning bid was for $33,000,000 and the allocation of the cost is of 89%/1%/10%. |

|   |   | Costs | | | |

| Underdeveloped acreage | 89% | $29,370,000 | | | |

| 500 finished lot | 1% | $330,000 | | | |

| Recreational facilities | 10% | $3,300,000 | | | |

| Total | 100% | $33,000,000 | | | |

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Total purchase cost | $33,000,000 | | | | | | |

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Question 2 | | | | | | | |

What is the projected NPV of the project? | | | | | | |

Answer: | | | | | | | |

The projects NPV | Cashflow | D/F(12%) | PVCF | | | | |

Year 1991 | ($33,000) | 1 | ($33,000) | | | | |

1992 | $22,331 | 0.8929 | $19,939 | | | | |

1993 | $23,039 | 0.7972 | $18,366 | | | | |

94 | $26,939 | 0.7118 | $19,175 | | | | |

95 | $36,598 | 0.6355 | $23,258 | | | | |

96 | $42,178 | 0.5674 | $23,932 | | | | |

97 | $57,118 | 0.5066 | $28,936 | | | | |

98 | $46,199 | 0.4523 | $20,896 | | | | |

99 | $53,519 | 0.4039 | $21,616 | | | | |

The Project's NPV |   |   | $143,118 | | | | |

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Question 3: | | | | | | | |

Is this project a slam-dunk for the corporation? | | | | | |

Answer: | | | | | | | |

IRR | 80% | | | | | | |

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This project is a great opportunity for the company as it is yielding positive NPV and higher IRR. The return generated by the project is far higher than the cost incurred. | | |

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