I. Case Overview 2
II. Analysis and Assumptions 2
III. Financial Analysis 4
IV. Recommendations Reasoning 5
Appendix 6
Exhibit 5
Exhibit 8
I. Case Overview
Angus Cartwright III, an investment advisor, was asked to provide investment advisory services for two clients, John DeRight and Judy DeRight. They both wanted to purchase a property that (1) is large enough to attract the interest of a professional real estate management company and (2) has a minimum leveraged return on their investments of 12% after…show more content… On the simple return measures, Stony Walk had the highest Capital Rate on Purchase where Fowler ranked at the highest in Capital rate on Sales; Alison which had a high cash flow with low vacancy rate, and thus a high effective gross income was ranked in first for the Cash-on-Cash Return; Fowler which was still under construction and appeared to be undervalued had largest increase in capital value.
On the discount return measures, Fowler had the highest IRR at 15.38 while Stony Walk had the lowest rate at 14.54, with a difference of 0.84; Alison had largest NPV with a difference of $115K comparing with the lowest NPV; Fowler which required the smallest equity investment had the highest Profitability Index.
While the two residential properties have higher returns from their on-going cash flows, the increase in the investment value of the other two commercial properties will come from future value increase – see Exhibit 9.
Completed exhibits for all four properties are included in the Appendix. The relevant analysis of other financial exhibits is integrated in the following chapter as reasoning of the recommendations.
IV. Recommendations
If we simply select an investment choice based on the highest IRR rate, Fowler should be recommended for both clients. However, as we better understand the components of the IRR (see Exhibit 9 in Appendix), we should try to
