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Brookfield Properties

Brookfield Properties is a large corporation that owns and manages many business properties. It is currently considering the purchase of an office building in downtown Corner City. The purchase price of the building and the land on which it is built is $5M. Brookfield would make a down payment of $1M and take a 30-year mortgage for the balance. The interest rate on the mortgage would be (4.5%,2), and mortgage payments would be made monthly.

Expenses incurred by Brookfield for purchasing the building and land will be $50,000.

The market value of the property is expected to increase at an annual rate of 4 percent. Brookfield would sell the property at the end of five years at its market value at the time. The company estimates its expenses for selling the property will be $250,000.

The building has a rentable floor area of 20,000 square feet. Brookfield would rent space the first two years at a monthly rate $5/square foot, and the rate would increase by 4 percent each year after the first two. Occupancy is expected to average 85 percent for the first year, 92 percent for the second year, 95 percent for the third year, and 98 percent thereafter.

The sum of annual expenses for maintenance, management, and property taxes is expected to be $500,000 for the first year and to increase at a rate of 3.5 percent each year thereafter.

The building will be depreciated by straight-line depreciation, based on zero salvage value and a life of 39 years. Because land is not depreciable, the propertys depreciation is based on the initial cost of only the building, which is 80 percent of the propertys purchase price.

Assume that the property is placed in service in the first month of the first year.

Depreciation, mortgage interest, and annual expenses for maintenance, management, and property taxes are deductible expenses for computing taxable normal income. Use 40 percent for the tax rate on the taxable normal income.

Because of the propertys appreciation, there will be a substantial taxable capital gain when it is sold. The taxable capital gain is the amount realized from the sale (i.e., the price at which Brookfield sells the property less its selling expenses) minus the propertys tax basis. The propertys tax basis is its original $5M purchase price plus any purchase expenses and capital improvement costs less the cumulative depreciation at the time of sale. Use a value of 25 percent for the tax rate on taxable capital gain.

Brookfield uses a risk-adjusted rate of return of 13 percent to evaluate the net present value of this type of investment. You may assume that the rate of return for reinvesting any cash inflow from the investment will also be 13 percent.

(a) Do a year-end financial analysis for the five years to determine the after-tax net present value, and internal rate of return.

(b) Present the NPV profile for this project. (c) Should Brookfield Properties accept this project?

Use excel to answer and Please show all steps!!!