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Mid-Term Case Study
Project introduction
Project one is for Hopkins Charter School, which has agreed to an 18-year lease and will move in after renovations are completed. It charges no tuition and is funded by local governments through state and local taxes. In addition, schools must apply for a charter, initially for three years and then for a five-year extension. The total cost of the project is $10,541,600, with annual revenue coming primarily from Hopkins rent and 18 years of antenna rent. The upper limit indicated in this project is between 6.5 and 7.5 per cent.
Project assessment
The net present value ofProject 1 calculated at the minimum discount rate of 6.5% is -1,288,611 US dollars < the average discount rate of 0,7.0% is -1,639,987 US dollars, indicating that the cash outflow discount of the project is greater than the cash inflow discount during the investment period, and the investment is not accepted.
Net Present Value @ |
6.5% |
$ (1,288,611) |
|
7.0% |
$ (1,639,987) |
7.5% |
$ (1,971,785) |
Project 1 has an internal rate of return of4.88%, which is below the minimum guideline of 7%-8%, and does not accept investment.
The return on investment and average cash yield ofProject 1 is 8.67%, which is above the minimum guidance of 6.5-7%, indicating that the project is worth investing in.
Risk analysis
Project 1 has the following risks:
a) There is uncertainty in the future unleveraged cash flow of the project. Because charter schools can evaluate their performance and have a comprehensive evaluation conducted by the local board annually during the initial charter period and every five years thereafter. If Hopkins Charter School fails to renew its charter, it may cease to continue leasing the property.
b) While the existing antenna tenant pays rent annually, the owner is unable to provide the actual lease documents, which may create uncertainty about future antenna rental income.
c) Because long-term lease transactions for properties leased to charter schools are infrequent, the discount rate shown may not fully reflect the risk of the project.2.
Project 2 Analysis-GAS / CONVENIENCE STORE PROJECT
Project introduction
The goal of Project 2 is to develop a 4.5-acre site as a fully serviced gas station/convenience store. The property sits next to a 75 - to 100-year-old grocery store that has been vacant for at least 20 years. Currently, it has signed a 20-year lease with a well-known gas station and convenience store operator. The property has been subdivided and fully licensed for its intended use, but has the physical potential to support an additional 10,000 square feet of retail space. The total cost of the project is $3,925,000. Based on demographic projections, the median gross household income for 1 -,3 - and 5-mile households is $278,302. Assuming a base rent plan of $275,000 per year and rent increases of 10 per cent every five years, the project indicates a cap rate of between 4.5 and 5.5 per cent.
Project assessment
Based on a minimum discount rate of 4.5%, the net present value of Project II is -$118,787 > 0,5.0% and an average discount rate of-$61,546, indicating that the project is acceptable for investment near the minimum to average discount rate.
Net Present Value @ |
4.5% |
$118,787 |
|
5.0% |
$ (61,546) |
5.5% |
$ (230,308) |
Project 2 has an internal rate of return of4.83%, which is below the minimum guideline of 7%-8%, and does not accept investment. The IRR ofProject 2 is also lower than that ofProject 1. The return on investment and average cash yield of Project 1 is 8.13%, which is higher than the minimum guidance of 6.5-7%, indicating that the project is worth investing in.
Risk analysis
Project 2 has the following risks:
a) Project users need to support the physical potential of an additional 10,000 square
feet of retail space and convince the township and community that variance should be allowed.
b) The base rent used by the project is based on the projected median income ofHH
within 5 miles. If the project does not achieve the expected rental income, the future cash flow inflow will be lower than expected.
c) The capping rate used in Project II is lower than that in Project I.
Conclusion
Although Project I is better than Project II in terms of return on investment, average cash return and internal rate of return, the investment period of Project I ( 18 years) is smaller than that of Project II (20 years).
However, from the perspective of net present value, Project 2 is better than project 1, indicating that under different risk discount rates, Project 2 can bring greater return on investment during the project period. In addition, the investment cost of Project 2 is smaller than that of Project 1, and the properties leased to natural gas and convenience stores are traded more frequently. Therefore, the capping rate ofproject 2 is low, indicating that its investment risk is low. Based on the above analysis, I suggest investment project 2.