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Augus Cartwright Case Case Solution & Answer

Angus Cartwright Case

900 Stony Walk:

Stony Walk is an office building having rental space of 67000 square feet, located nearby Alison green. The purchase of building will be financed through the commercial mortgage backed security loan. The project achieved IRR of 44%, NPV of $7.87 million capitalization rate of 3.09% at the time of purchase, cash and cash return of 37% , investment multiple of 6.03 and increase in capital value of 13%. Stony Walk seems a profitable investment as IRR, NPV, cash on cash return, investment multiple are higher when compared with Alison Green. However, increase in capital value and capitalization rate are much lower than Alison, indicating that property will be sold at a lower value as compared to its cost. (See Appendix 1)

The project earned before tax cash flows of 98% and future value of 84%, which makes the project most profitable among other investments. However, the higher loan to ratio value and lower added margin make the investment a bit riskier.  (See Appendix 2)

The Fowler Building:

The fowler building is a two floor building having a rental space of 11000 square feet, and has an occupancy rate of 95%. The price of the building is 2.75 million, which is costly as compared to 15 million cost of Stony Walk, and the reason behind it is the larger space provided. The building achieved NPV of $11.63 million and IRR of 25%, which is lower than Stony Walk but higher than Alison green. The cash on cash return of 23.58% achieved by the building is lower than Stony Walk. However, the achievement of 25% increase in capital value is quite higher than Stony Walk, indicating that significant gain will be earned by the investors in case of its sale in future.  Pretax investment multiple is lower than Stony walk but higher than Alison green, therefore, investors will prefer buying this building as compared to Alison green. (See Appendix 1)

Ivy Terrace:

Ivy Terrace is a 75 unit office building located in Arlington, and is available to small service firms for rental purposes. The building costs 11 million, and is depreciated on a period of 27.5 years using straight line method. The building is mortgaged at an amount of $7 million along with an interest rate of 4.25%. The building generated 4.5 million NPV, which is lower than Stony Walk and The fowler building, but much higher than Alison Green. Both Ivy Terrace and Alison green have almost similar internal rate of returns that is 13.2%, which is lower than the fowler building as well as the Stony Walk. (See Appendix 1)

The future value of the company is 95%, which is higher than all other three buildings and the capitalization rate at the time of purchase is 6.61%, higher than all three buildings. In terms of added margin and increase in capital value, Ivy terrace seems the most profitable investment. The loan to value ratio of 64%, which is lower than other three buildings, indicating that financing the purchase of stony walk will be cheaper, whereas it has the higher debt service coverage ratio (See Appendix 3) as compared to other investments, which indicates that the higher cash flow will be available to pay current obligations raised from funds borrowed to purchase this building. (See Appendix 2)

Conclusion

Stony walk will be ranked as the most profitable investment as it achieved cash on cash return of 38%, IRR of 43% and investment multiple of 6.03, which is the highest among all investments. The Fowler building will be ranked as second, as it achieved the IRR of 25%, NPV of 11.85 million, cash on cash return of 24%, increase in capital value of 25% and an investment multiple of 4.85 times. Since investment decisions in real estate businesses are taken on the basis of Cash on Cash return and investment multiples, the investors will invest in Ivy Terrace, the fowler building and Stony walk as these projects provide maximum returns. On the other hand Alison green has the higher capitalization rates, which is an important measure of project evaluation in real estate businesses. Therefore, investors might decide investing in Alison green, because of higher investment multiples as compared to rest of the properties….

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