Prepared by: CFO, ABC Construction and Leasing Company
Date: July 21, 2010
TABLE OF CONTENTS
Introduction Page 3
Project Feasibility Report Page 4
Assumptions Page 5
Economic Factors Page 6
Capital Structure Page 8 Mortgage Schedule Page 9 Costs Schedule Page 11 Depreciation Schedule Page 12 Sales Revenue Projection Page 13 Net Working Capital Page 15 Income Statement Page 17
Profitability Index Page 24
Accounting Rate of Return Page 25
Conclusion Page 26
ABC is one of Canada’s leasing integrated construction and leasing companies. Founded in 1980, ABC has built an unmatched reputation for market excellence, stability and innovative leadership in the marketplace. Our company has successfully ventured several real estate and construction projects over the last three decades. The credit for this success goes to our planning department for their informed decision making, the sales and marketing departments for maintaining excellent customer satisfaction standards, our engineers, architects and the entire ABC team. Together as a family we continue to strive for further success and look forward to upping the ante in the years to come.
PROJECT FEASIBILITY REPORT
This report highlights some facts, expected figures and an analysis on a potential real estate investment opportunity. The project is a 35 year old multistoried residential condo building with 400 apartments. A summary of the positive outcomes for ABC Corporation from this project would be:
To increase presence and penetrate market share in the real estate market in the Toronto downtown core
To take advantage of current market condition namely low interest rates and to be able to generate a steady income stream from this project till eventual sale.
To make a prudent and an informed decision several key factors need to be analyzed in details such as:
Investment criteria(NPV and IRR)
Accounting rate of return
A detailed analysis of the above mentioned factors follow.
Following is a list of assumptions that have been established for this project:
Interest rate is 4.50% (Govt. of Canada 5 year Bond yield 2.5% plus Risk Premium 2%)
Tax rate is 30%
Duration for continuing operation is 5 years after which the building has to be listed for sale.
Weighted Average cost of capital (WACC) method will be used to develop the best possible mix of debt to equity.
Maximum equity that can be issued is $30 million or 30% of acquisition cost
Rental leases will be for 5 years as opposed to 1 year agreement currently in effect
Capital cost allowance (CCA) rate is 4%
Inflation rate is 1%
Over the last decade several new construction projects have been completed in the Toronto downtown core. The result of which is a surplus in the amount of condos available for sale. According to a release by the Globe and mail, builders of these condominium buildings have had to suffer great amount of losses due to the surplus. The focus is now switching over to renting the vacant condos till they are eventually sold.
The building which ABC is eyeing has 400 apartments which have been on rent for several years. The building is close to subway station, universities, shopping malls, grocery stores and parks which make it attractive venue. Thereby achieving 90-100% utilization on the rental apartments will not be daunting task for ABC’s experienced sales and marketing staff.
The building currently has renters which have annual leases. Since ABC is targeting to sell the building after 5 years, the plan is to lock in the leases for 5 years which will provide for some cushion against vacancy losses.
The building has 2 and 3 bedroom apartments (which is mainly 2 bedrooms and a den). The average rental