A French real estate developer specialized in the upscale residential sector bought a parcel of land last year to develop a high-end project comprised of 100 residences in a well-known neighborhood of Cannes. The company paid $80M for the land and will develop, sell, and operate the residences.

Market study for the area suggests that the company could sell 30% of the residences on year 1, 30% on year 2, 20% on year 3, and the remaining 20% on year 4. Price per residence is expected to start at $5 million for year 1 and expected to increase by 15% per year for years 2-4.

The company will also manage and operate the residences for the first 4 years, which will cost 20% of the revenues.

Beyond the cost of the land, the investment cost to develop the project amounts to $240 million in year 0. The cost of the project is depreciated 25% each year, and it will require $10 million in working capital in years 1 to 3; the working capital is then reduced to 0 in year 4.

After the company has sold all the residences, it will stop operating them and no further cash flows will proceed.

The tax rate is 35% and the project's cost of capital is 12%.

Questions:

What is the expected revenue in year 2?

What is the expected EBIT in year 2?

What is the expected change in WC in year 2?

What is the expected cash flow in year 2?

What is the expected NPV of the project?

Should the company launch the project?

Answer rating: 100% (QA)

Answer To solve this problem well break down each component step by step Calculate the revenue in year 2 Calculate the EBIT Earnings Before Interest and Taxes in year 2 Calculate the change in working ... View the full answer