South Park IV Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

South Park IV Case Solution

Currently, the property is fully leased by 4 tenants and the lease will expire in 1990. It is expected that same tenants will continue to renew lease at same prices and if Laflin switches tenants it will charge $2.5 per square feet as lease rentals, therefore calculation for lease rentals is performed by using $2.5 per square feet.

First of all, net operating cash flows are calculated by using appraiser’s foretasted data. All expenses are deducted from the expected potential gross income, which is calculated by using lease and market rate upon their expected capacity of rent-able space. By deducting all operating expense, the operating cash flows are identified in order to calculate free cash flows.It is expected that maintenance and lease commission will only be paid in year 1, year 4 and year 10 and all other calculations are performed for 11 years in order to calculate realistic figure of loan payments and property value.

After calculating the operating profit before tax the cash flows are calculated by deducting debt service cost, which is calculated by using loan amount, loan period and interest rate. After that the after tax cash flows are calculated by applying 39.6% tax rate upon before tax cash flows.

Interest value and tax value is calculated with the help of amortization table. By putting the initial-value of the loan and deducting ending value, then principal amount of the loan is identified and then deducting this principle-value from the annual interest rate, the interest value for the year is identified. By performing same calculations, the interest value for 10 years is calculated in order to identify taxable profit.

The calculation is performed by deducting the interest value from net operating profit before tax and depreciation. The calculation of depreciation is performed by using 39 years as a useful life of the property and then deducting the depreciation from the operating profit taxable income is identified.

In order to calculate the sale value of the property, the 10^th year operating profit is divided by the 10% going out cap rate and gross sale price at 11^th year is identified, which is $2293515 dollars. Furthermore, the 5% selling expenses are deducted in order to calculate the net sale value of the property. It is expected that capital gain tax rate is 28%; by applying this rate on the value of the difference between net sale and purchase price of the asset, the capital gain tax is identified which is 190075 dollars.

Moreover, after-using initial cash flow, the after tax cash flows from operations and after tax cash flows from sale total cash flows are identified. Initial investment is the difference of purchase price and loan amount. In addition,by applying 12% desired rate of return on total free cash flows, the net present value is calculated, which is $296683. After calculating the net present-value,the internal rate of return is also calculated upon free cash flows, which is18% and it is greater than the expected rate of return.

After calculating the net present value and internal rate of return, the sensitivity analysis is-performed by assuming different scenarios upon expected return, going out cap rate and loan interest rate. By performing sensitivity analysis, it is clear that the increase in required rate of return will increase the going in cap rate and interest rate and gradual increase in required rate of return will result in decreased value of NPV and at 20% net present value will become negative.

However,in the case of cap rate,the increase cap rate to 12% will generate negative net present value. It is expected that the investment is less sensitive to loan rate as increase in interest rate to 9.6% will generate positive net present value.

Conclusions and Recommendations

Decrease in oil prices in the previous year affected the global economy and each industry as well. It is expected that oil prices will start increasing which will put a positive impact upon the US and global economy. It would also put a positive impact on real estate industry, which is definitely a positive sign for Laflin with respect to proposed investment. In addition to this, by calculating the net present value and internal rate of return through discounted cash flow model, it is clear that the proposed investment is generating positive net present value and also generating higher internal rate of return than desired rate of return. By performing sensitivity analysis, it is also clear that the investment is sensitive to required rate of return however,positive changes in economy and location of the property are sufficient to neglect that impact. Laflin also has the opportunity to acquire a secure loan upon soft terms;therefore it is recommended that Laflin should go for the investment as it will prove beneficial for Laflin in all terms......................

This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.

South Park IV Harvard Case Solution & Analysis