SFU Surrey is planning to expand the campus with a $90-million government investment for a fivestorey, 15,000-square-meter building. The announcement was made in Nov 2016 by Prime Minister Justin Trudeau, together with B.C.’s Premier Christy Clark and SFU President Andrew Petter. Now assuming the construction project takes three years to complete. Within the project cycle, a government financial agency loans the university with $30M at the beginning of each year. An initial cost of $60M is required to claim the land ownership. The labor and materials cost is a fixed amount of $1M per month, payable at the beginning of each month. Upon project completion and a year of grace period, the property assessment agency values the building worth of $120M. But now the university needs to pay back the government with 25M per year for four years.

a) From the government financial agency’s perspective, draw a cashflow diagram and calculate the IRR for this investment.

b) From the university’s perspective, calculate the IRR this project. (Hint: no need to consider government funds as parts of the cashflow)

After decades of operation, the university is having financial crisis and is looking to either sell or lease the building for cash. If you are a potential buyer and there are two options available: Buying the building right now will cost $200M. The other option is to lease the building, which is $10M payable at the beginning of each year. In either case, you must pay city taxes, maintenance, and utilities, which are $2M/year, payable at the end of the year. The building will be functional for 15 years. If you buy the building, you could then sell it, for an estimated $300M.

c) What rate of return will you receive by buying the office building instead of leasing it? Assuming your MARR is 10%, should you buy or lease the building? Why?