Purchase Evaluation

Management is considering acquiring new office space by purchasing Zone A property which would cost $5,000,000 to buy today.

It has been estimated they could sell the Zone A property in 8 years for $8,500,000.

They will have to take a loan and pay an interest rate of 7.5% on that loan.

1. What is the Present Value of the sale proceeds from the Zone A property?
2. Should the fund purchase the Zone A property and if so, why?

The health fund realize they could rent out part of the one A property that is surplus to requirements and receive rent of $350,000 per year.

1. What is the Present Value of the sale proceeds from the Zone A property with rent?
2. Should the fund purchase the Zone A property with rent and if so why?

They receive a new offer of another building, the Zone B property but with slightly different conditions.

• It costs $500,000 less to purchase
• The rent to be received would be $150,000 less per year, however, the interest charged on the loan would be 1% less per year.

The Zone B property could be sold in 6.5 years, but they would receive $1,000,000 less than the Zone A property

1. What is the Present Value of the sale proceeds from the Zone B property?
2. Which is more attractive, the Zone A property (with rent) or the Zone B property?

The health fund has surplus funds available of $3,000,000 and can invest the funds earning 8% per annum

1. How long would it take for them to have enough money to purchase outright
2. The Zone A Property
3. The Zone B Property

The health fund finds it only has $2,75,000 to invest but can utilize an alternative investment and earn 9.5% per annum

1. How long would it take for them to have money to purchase outright
2. The Zone A Property
3. The Zone B Property

- THE calculations must be as a separate Excel file

- outlining all these scenarios and being sure to highlight the importance of the time value of money as one of the considerations.

- Make a recommendation as to which scenario you feel is the best option and outline your reasoning for that determination. Also, explain if you consider there may be other factors that should be considered.

Instructions for your tutor:

 

Provide references

Answer rating: 100% (QA)

To assist you with your request Ill provide the necessary calculations and analysis However Im unabl... View the full answer