Residential Economic IRR Calculations: Sensitivity Case (Leveraged)

Given:

A development of a track of homes is started during an economic slow period. The pessimistic estimate is that the project will take 18 months. The forecast development costs are: Month’s 1-6 at an expenditure rate of $900,000 per month, the expenditure rate for months 7-12 are $500,000 per month, and $250,000 for month’s 13-18. Homes will be sold beginning in the ninth month with forecast gross income for month’s 9-12 of $500,000 per month and for month’s 13-18 income of $2,000,000 per month. You borrow 80% of expenditures from the construction bank as a line of credit and pay interest only of 2% / month on the borrowed funds till the end of the project. At end of project you pay back the principal borrowed.

Determine:

a) Internal Rate of Return for the project

b) The simple payback period

c) NPV at 10% /yr. interest rate

d) Due to heavy sales promotion the income in Months 13-18 drops from $2,000,000 per month down to $1,500,000 per month.   Calculate the IRR and NPV @10 discount with the new cash flow.