You are a financial analysis at Greek Enterprises (GE). Your manager calls you into their office and

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Question:

You are a financial analysis at Greek Enterprises (GE). Your manager calls you into their office and asks you to support the capital budgeting process by evaluating two capital investment alternatives submitted by the real estate side of the company. Your manager explains that the company has a company policy of 12% minimum required return for all projects, but will increase this to 15% depending on the risk of the project. The corporate tax rate is 30%. The proposed capital project calls for investing in either a multi-residential complex or commercial rental property. The residential property has a cost projected at $594,000, while the commercial property would cost $1,326,000. Historically the land is worth 20% of the overall value, with the building worth 80% of the overall value. The building would be capitalized and qualify for the CCA rate of 6%. In addition, GE would hire a property management consultant under either alternative to assist in making the decision whether to invest in the project for a fee of $15,000, and this cost would be expensed when incurred. If the property acquisition goes forward, the residential property is anticipated to have monthly net cash flows of $2,200, projected to increase annually by 2%. The company anticipates the property will be vacant for 1 month between tenants every two years to allow for renovations to keep it modern. If the property acquired is a commercial property, the property is anticipated to have monthly net cash flows of $4,250, projected to increase annually by 3%. The company anticipates the property will be vacant for 4 months between tenants every five years to allow for renovations to keep it modern. GE holds their properties for 20 years at which time they will be sold. History tells them that their properties appreciate 2% in value per year they are held (compounded).

Calculate the NPV, IRR, Payback Period, and PI.

Suggest which alternative is better, if any.

Please factor in the vacant months, CCA rate and taxes.