Capital Expenditures

The capital expenditure of the project is assumed to zero as there is no expenditure which results in the increase in the project life and hence the capital expenditure is zero. This cannot be true as there must be some capital expenditure because there are always some kind of capital expenditure on the buildings which increase the capacity or the building life in total.


The commission is included as the management fees which is approximately 1.5% annually which is included in the projection as the management is making the assumption that the fees will continued to be received by the company in future too which states a rather complicated assumption as the management might not get any commission in future because the property might not be sold or there might be low level of demand for the properties in future.

Credit losses

The credit losses calculated are losses which might not be correctly estimated as there is a high chance of the credit loss being incorrect. The incorrect credit losses might make the project more attractive for the investors. The assumption is that the credit losses are 3.5% of the rental revenue whereas the credit losses might increase in the future time period.The credit losses might be more than 3.5% of the rental revenues.


The vacancy has been calculated and the data for the vacancy has been acquired and the key assumptions made is that some of the Suites such as suite 102, 107 and 205 will be vacant all the year and this assumption cannot hold true and the management might make decisions on this assumption and later those decisions prove to be wrong and ineffective. These estimations are very sensitive and this can lead to the management making projects which can lead to huge losses for the management.

Financing terms

The financing terms of the project are that 95% of the cash would be raised from outside and 5% would be raised by themselves for the project and this will not have an  increase in the gearing of the company as a huge amount raised for the project would have been from outside and hence the company should have financed some 50% from equity and 50% from debt as debt is cheaper source of finance but it is cheaper in comparison to other sources not in the standalone basis if compared.

Hold period

Zaski assumed that the holding period would be 3 to 5 years and she got the projected cash flows of six years to estimate the costs and revenues of the project but the holding period is assumed to be 3 to 5 years and Zaski might hold the property for more than 3 to 5 years considering the profitability and the IRR of the project and hence the estimate of the 3 to 5 years of the holding period would be incorrect for the company.

Q4(A).Market price for financial commons

The market price of the project is 10,400,000 which can be true if the competition of the market is compared and considered.to be good price as the building is only 90% occupied whereas the competitors might offer rates which can be far more higher than the rates for the financial commons and the company is getting a positive cash flows each year if it is assumed that the costs and the revenues of the project are accurate then the company is earning more than it is giving as a cost so the project is viable for the company and hence the purchase price of the financial commons is right because it is giving a more return to the company then the 10,400,000 being paid by the company so it is considered to be a good option to invest in the project and the competitors might ask for a higher rate or other real estate companies. The competitors of the company wildcat might take the opportunities before wildcat proceeds with the decision so this will lead to the opportunity being missed by the company so it is a better option to do this now and avail the opportunity and earn a return on the project rather than rejecting a project which yields profit to the company and its investors.

Q5 .Additional information required for the project

The additional information would be required by the investors before proceeding with the decision because the projections provided and the information provided by the company is not enough to reach a high level decision which involves the investment of $10,400,000 of the project.

Q5(A)Hold period

The vacancy rate of south Chicago is 9.8% which says that the market demand for the building is quite high as the vacancy rates below 10% states that the 90% building on average are occupied and this might lead to the cost of the project further more high in the future so the hold period of 3 years is not a good idea as the property rates will increase in the future and the rental lease rates might increase overall in future too.The hold period should be extended to five years as the other years might lead to an increase in the profits for the company and hence the company would receive revenues in the future years and this will lead to the project more profitable than it is currently. The hold period has several assumption and everything is forecasted for the 6 years in the calculation and hence a decision if quite risky to limit to 3 years as the company should do 3 years agreement and should plan to do the project on 3 years but if the conditions of the economy are as they are currently then the company can extend the agreement and can ask for further 3 years which is a more safe and sensible option for the company and hence the project should be on 3 years and the option for the renewal should be considered after 3 years of the project…………………

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