Executive summary of the decision:
Rick has received an of fer of $137 million to sell the land to a third person at a price of $137 million in the third quarter of 2011. The offer is not viable by looking at the value of the land alone itself, but not considering the future cash inflows that is the real reason to buy the land by its beneficiaries. The value of land is 166.34 million, according to the capitalization rate of 4.5% (Appendix 1).
The option seems to be unfavorable because the land’s value is higher than the offer, the price is too higher than this because of the future expected cash inflows that are the real means of the income of the property. The discounted return of the trustees is 7% therefore the value must be discounted at the rate of required return.
The property is situated at the main location in New York with all necessary utilities available from the city of New York. The property does not have any of the fear of flood that can destroy the property or affect the value of the land after some period or the current period.
The property is situated at the prime location in New York therefore there are high chances that the estimations about the rental income and property value may be understated by looking at the location and growth prospect in the New York after the balloon and the credit crisis of property in 2008. It is situated in the premier office and retail location, therefore the chances are very low that the value of the company and rent can decline in any case of the economic conditions.
On the other hand a property balloon can be observed in the future days that can affect the property value of the land, the owners of the trust are willing to earn the revenue through the rental income from the land lease terms. The income is proved to be the source of income for trustees and beneficiaries therefore the loss of the income situation must be considered before going through the sale of the property decision.
The sale of the property is only viable if the beneficiaries have other sources of income or the source can be derived through the sale proceeds from the sale of the property.
It is a general phenomenon that the land never depreciate in its value therefore the land at the prime location of New York should not be sold if it is affordable by the owners of the land but a good price can change the decision.
The sale can be attractive if the economic price of the company is received by the owners of the property and the price must include the land value and the benefits of lease rental that owners are able to receive from property lease agreement.
The economic price of the company is the present value of the each future cash flow that are related to the sale of the property and future lease receivables. The resent value of the future cash inflows through the lease rentals is $188 million. The value is the receipt of the lease rental and the current value of the land is $102.5 million that derives a total value of the land $295.6 million.Rick’s Dilemma Case Solution
The land must be sold at this sale proceed or above, but not less than this, through accepting the bid at this price the beneficiaries are eliminating the risk of any future uncertainty of the cash outcomes from the lease of the property.
The minimum acceptable value at the different dates are given in the appendix 2, as the value at 2054 is already given in the case, but the other values are derived through the value growth and the discount rate of the trustees i.e. 7%.
The value of the property at 2022 is $383.8 million, $721 million in 2043 and $819 million in 2054 (Appendix 2). The price must be the specified prices, but not less than that................
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