Question - A 5 storey office block is in the market for R 50 000 000 (including transfer duties, administration and commission expenses). The following information is applicable:

The office block consists of 5000 m2 lettable space.

You realize upon looking at the drawings that there is a possibility to add another floor consisting of 1000 m2 lettable space. (The height restriction for this particular property is 6 storeys).

The development cost for the additional floor will amount to R10 000 000 over a 6 month construction period.(For purposes of this question, assume that this payment is only made at the end of the 6 month period)

A financial institution offers you a mortgage bond of 80% on the total cost of the office block, including the new additional floor. The amortization rate is 11%, monthly compounded. Bond payments will be made at the end of each month.

You gather from the current rental market that you may ask R 200 per square meter, which include operating expenses.

Diverse expenses including maintenance, property tax, water and lights, amounting to R 50 per square metre.

The expected growth in the value of the property is at 15% per annum.

The lease period is 10 years, while the bond period is 20 years.

Escalation on the lease amount as well as on the diverse expenses is at 6% per annum.

You plan to sell the property at the end of the investment period which is after 10 years.

The discount rate where applicable is 11%, calculated monthly.

(a) Calculate the net monthly cash flow for the first year, after taking into account the development costs, bond and diverse expenses as well as the lease payments.

(b) Determine the net present value for the first year.

(c) Determine the Net Present Value for the investment period.

(d) What is the internal rate of return?