Southpark Iv Case Study Analysis
Sensitivity Analysis
However, based on the analysis of different prices and their competitiveness to win the bid reasonable purchase price of $1,169,904 million will be a reasonable price forbid because based on the sensitivity analysis performed in excel sheet, it has been established that at this price with the vacancy rate of 5%; the highest capitalization ratio will to achieved and the higher the capitalization ratio; the better the investment opportunity will be, meanwhile, at this price the return on equity will only be 3.95% that is quite below the expected return of 15%. Furthermore, this price and expected return on equity are based on the vacancy rate and changes in the vacancy rate will affect the results of the analysis performed.
Meanwhile, comparison with the past property transactions reveals that purchase price had been based on the different characteristics of property building and comparison of SouthPark with those past transactions reveals that SouthPark is similar with the eight number of sales transaction as seen in exhibit 5 and that property was sold for 20.27 per square foot. Whereas SouthPark is being sold for 18.78 per square foot ($1.5M/80,000 square feet) but at this price, the net present value of the project becomes zero, which indicates that the project is not worthwhile. However, different factors are responsible for variations in property prices and one of the main factors for this investment appraisal is the revenue stream that the property is expected to generate and the revenues are dependent on the population and employment levels because the higher the population and employment; the higher will be the occupancy, hence, the demand of property will increase and the price of the property will also increase. Therefore, the data given in table 2 shows that the overall employment level has slightly decreased and similarly the population has also declined in the Huston area; hence, the prices of SouthPark should also decline.
The asking price is too high as the projections and calculations show that the project is not profitable by Gorge Latin. Cash flows and other selling price calculations are also helpful for Latin to see that the asked price is higher than the actual cost of the property. The lower price of Southpark will be a good offer to achieve the desired objectives of profitability. These calculations also show that if the demand for the property islow, the investors will enjoy high returns on the investments as the cost of capital will be low.
Conclusion
As the calculations have been identified on realistic data and assumptions, cash flows are projected, net present value and investment of the project are negative. The required rate of return is also far more than the return on equity. So the investment in this project is not profitable for Latin and it is also recommended that there should be no investment in this property. The cost of new tenants is also high as and the current leaseholders are not going to renew tenant. The asking price should also be less and it should be the breakeven price for Southpark. The breakeven price is the only price on which Latin should purchase the property for a realistic rate of return.............................
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