Assuming the formula given above is correct, compute the NPV of the cashflows from going ahead...

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Assuming the formula given above is correct, compute the NPV of the cashflows from going ahead with the sale and leaseback deal. Show your working. Compute the terms in the formula. Use this formula even if you believe it is incorrect. If you believe the formula given was incorrect then also compute the NPV of the cashflows based on your alternative formula. Write a spreadsheet to implement the formula(e) and explain your spreadsheet implementation of it. By show working we mean compute the 3 terms P, [R (1-t) a(n,j)], and [X (1+i)"] 9 marks (ii) Is this sale and leaseback arrangement equivalent to borrowing money or equivalent to lending money? Justify your answer. 6 marks Give a brief reason for your answer (iii) How would you decide on the interest rate to be used for discounting the differential cashflows for NPV or to be used as the hurdle rate for IRR analysis? Discuss this issue both in relation to this specific project and for projects generally. 5 marks Give a brief discussion about the issue of how to choose the interest rate for the valuation - what are the possibilities to consider? (iv) Which of the variables /parameters in the financial model/NPV for this project have the highest uncertainty attached to them? Which have the lowest uncertainty attached to them? Why? Give a brief reason for your answer 5 marks You work for a bank. One year ago the bank bought a new head office building in the central business district. The bank has now been approached by a large investor with the proposition that the bank should sell its head office and then lease it back under a 5 year lease, and that at the end of the sale and leaseback arrangement the bank will repurchase the building for a price agreed on in advance. Assume that the building is fully depreciated for tax purposes so that ownership of the building does not generate any depreciation expenses for tax purposes. (i) Using the assumptions set out in the table below, compute the after tax cashflows at times 0, 1, 2, 3, 4 & 5. Assuming that the risk free rate of interest is RF = 6% and the market risk premium is(RM - RF) = 6% and the beta of real estate is 1.5, compute the market required return i on a property investment proposal. Suppose that the bank can borrow money for a 5 year term at a rate of 10% p.a. before tax. P= $20,000,000.00 after tax sale proceeds from selling building t = n = R = e= 30.00% tax rate on income 5 term of deal $800,000.00 rent in year 1 of 5 year term 4.00% rental growth rate % p.a. X= $25,000,000.00 | assumed cost of buying back building at end of term Check whether it is true that the NPV is given by the formula below, and suggest how the formula may be modified if you believe the formula is incorrect. NPV=+P-[R (1-t) a(n, )] [X (1+1)*] where j = 1 and a(n,j) = (1-(1+1)=) 1+i 1+e State whether the formula is correct or not and if you think it is not correct suggest a correction to it Check whether it is true that the after tax cashflows are as shown in the table below, and state what the correct figures should be if any of the cashflows are incorrect: Time 0 1 2 3 4 5 cashflow $20,000,000 -$560,000 -$582,400 -$605,700 -$629,920 -$24,344,880 State whether the cashflows are correct or not and if you think it is not correct suggest what corrections are needed Assuming the formula given above is correct, compute the NPV of the cashflows from going ahead with the sale and leaseback deal. Show your working. Compute the terms in the formula. Use this formula even if you believe it is incorrect. If you believe the formula given was incorrect then also compute the NPV of the cashflows based on your alternative formula. Write a spreadsheet to implement the formula(e) and explain your spreadsheet implementation of it. By show working we mean compute the 3 terms P, [R (1-t) a(n,j)], and [X (1+i)"] 9 marks (ii) Is this sale and leaseback arrangement equivalent to borrowing money or equivalent to lending money? Justify your answer. 6 marks Give a brief reason for your answer (iii) How would you decide on the interest rate to be used for discounting the differential cashflows for NPV or to be used as the hurdle rate for IRR analysis? Discuss this issue both in relation to this specific project and for projects generally. 5 marks Give a brief discussion about the issue of how to choose the interest rate for the valuation - what are the possibilities to consider? (iv) Which of the variables /parameters in the financial model/NPV for this project have the highest uncertainty attached to them? Which have the lowest uncertainty attached to them? Why? Give a brief reason for your answer 5 marks You work for a bank. One year ago the bank bought a new head office building in the central business district. The bank has now been approached by a large investor with the proposition that the bank should sell its head office and then lease it back under a 5 year lease, and that at the end of the sale and leaseback arrangement the bank will repurchase the building for a price agreed on in advance. Assume that the building is fully depreciated for tax purposes so that ownership of the building does not generate any depreciation expenses for tax purposes. (i) Using the assumptions set out in the table below, compute the after tax cashflows at times 0, 1, 2, 3, 4 & 5. Assuming that the risk free rate of interest is RF = 6% and the market risk premium is(RM - RF) = 6% and the beta of real estate is 1.5, compute the market required return i on a property investment proposal. Suppose that the bank can borrow money for a 5 year term at a rate of 10% p.a. before tax. P= $20,000,000.00 after tax sale proceeds from selling building t = n = R = e= 30.00% tax rate on income 5 term of deal $800,000.00 rent in year 1 of 5 year term 4.00% rental growth rate % p.a. X= $25,000,000.00 | assumed cost of buying back building at end of term Check whether it is true that the NPV is given by the formula below, and suggest how the formula may be modified if you believe the formula is incorrect. NPV=+P-[R (1-t) a(n, )] [X (1+1)*] where j = 1 and a(n,j) = (1-(1+1)=) 1+i 1+e State whether the formula is correct or not and if you think it is not correct suggest a correction to it Check whether it is true that the after tax cashflows are as shown in the table below, and state what the correct figures should be if any of the cashflows are incorrect: Time 0 1 2 3 4 5 cashflow $20,000,000 -$560,000 -$582,400 -$605,700 -$629,920 -$24,344,880 State whether the cashflows are correct or not and if you think it is not correct suggest what corrections are needed