Finance: Profitability and Financial Decision-making

This report discusses the profitability and financial factors required for decision-making in the Small Apartment Complex at the East Edge of Sam Hughes Neighbourhood Tucson. It includes assumptions, annual income computation, NPV, debt service coverage, debt equity ratio, and IRR.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Authors Note:

1FINANCE
Table of Contents
Introduction:...............................................................................................................................1
Assumption/Case analysis:.........................................................................................................1
Annual income computation:.....................................................................................................2
NPV:...........................................................................................................................................3
Conclusion:................................................................................................................................6
Reference....................................................................................................................................7

2FINANCE
Introduction:
In this report, discussion is made about the profitability and other relevant financial
factors that are required for the financial decision-making. In addition to the financial
sustainability the viability of the products are required to be evaluated for determining the
profitability and the other relevant factors. In the given case, the Small Apartment Complex
at the East Edge of Sam Hughes Neighbourhood Tucson is evaluated.
Assumption/Case analysis:
The project required an investment worth $ 1256309. This is a residential complex
and will be let out on rental basis. The complex holds 2 BHK and 3 BHK rooms of 20 units
and 5 units respectively. The rent per month is $ 935 and $ 1250 respectable for the two-bed
room house and the 3 bed room houses. The annual rental income amounts to $ 299400. In
addition to that, the rental property remains vacant for the 8% on the overall rent out period.
Therefore, the net rental income remains lower than the annual projected rent (Mera and
Renaud 2016). The net rental income for the in the year 1 is ascertained to be $ 275448. In
addition to that, the cost and the rental charges are assumed to be increased by 2% on the
total amounts, this will affect the profitability and the adaptability. With the respective and
reliable income sources, some operating expenses regarded as OPEX and some capital
expenditure (CAPEX) is required to be paid off. The OPEX or the operating expenses consist
of Re Taxes, insurance, interracial expenses exterior expenses, property management cost and
others which re incurred on monthly basis. Further, the reserve fund is made to ascertain to be
99000 per month (Rouanet and Halbert 2016).
The investors of the project are demanding the return for their investment in this
project of 8% on the total investments. The said property is the mixture of the equity and dent
investment. Therefore, the firm needs to pay of an amount out of its profit for the debt
maintenance. in an addition to that the monthly debt maintained cost amounts to be $ 5786

3FINANCE
monthly, therefore the annual expenditure for the debts maintained is calculated to be $
69433. For the evaluation process of the current investment plan in this summative
assessment varies calculation are made to ascertained the profitability of the business
proposal that are discussed here under (Cerutti et al. 2017).
Annual income computation:
In the given case, the calculation for the business income is conducted annually. The
draft is prepared for understanding and for the decision-making or evaluating purpose. For
the later years, the values are added with the inflation of 2%. In the calculation it has been
ascertained that the business is able to earn profits after deducting all the relevant expenditure
amounts to be $ 20314. The income statement will be helpful for various reasons such and
ascertaining the annual income of the business and the overall profitability of the business,
and for the calculation of the NPV and the IRR (Schwartz 2014).
Annual Income
particulars Amount
Gross Rent $299,400.00
Less: Vacancy 23952
Net Rental Income 275448
Less: Expenses
Annual Open $86,700
Annual Capex $99,000
Annual Debt Service $69,433.53
Total Expense $255,134
Net Income $20,314
NPV:
The NPV is the measure of the profitability of the business as this the calculation of
the present value of the future income when the discounting factor is the desired return of the
investors. The resultant figure is compared with the investment in the initial year. If the NPV
amount is zero or more than that then it can be said that, the investment proposal is profitable.

4FINANCE
That means it is worthy to make investment, as the investor will get the desire rate of return.
In the given case, the discounting factor is regarded as 8 %, which is the required rate of
return or the discounting factor (Aalbers 2016). The NPV calculation indicates that the
project is not profitable as the resulted NPV is negative. The NPV of the project is -
$1161709. This means the investors will gain more than the desired returns.
Project return/ NPV
Particulars YEAR 0 1 2 3 4 5
Cash Flow
-
$1,256,309
.00
$275,448
.00
$280,956
.96
$286,576
.10
$292,307
.62
$298,153
.77
LESS:
OPEX
$86,700.
00
$88,434.
00
$90,202.
68
$92,006.
73
$93,846.
87
Capex
$99,000.
00
$100,980
.00
$102,999
.60
$105,059
.59
$107,160
.78
Debt Service
Coverage
$69,433.
53
$69,433.
53
$69,433.
53
$69,433.
53
$69,433.
53
Net Cash Flow
$20,314.
47
$22,109.
43
$23,940.
29
$25,807.
77
$27,712.
59
Discounting
Factor $0.93 $0.86 $0.79 $0.74 $0.68
Discounted Cash
Flow
$18,809.
70
$18,955.
27
$19,004.
58
$18,969.
48
$18,860.
73
NPV
-
$1,161,709
.25
Furthermore, as the investment is availing the debt option then another valuable ratio
that is calculated is the debt service coverage ratio. The debt service is calculated by dividing
the total debt cost by the annual income. In the given case, the resultant figure is 0.25. This
means one fourth of the revenue is paid off for the debts; this is very high and is not a
positive sign for the entity (Cerutti et al. 2017).
Debt Service Coverage

5FINANCE
Debt Cost $69,433.53
Net Income 275448
Debt Service Coverage 0.25
Another investment decision-making assumption is the debt equity ratio. This ratio
provides a detailed knowledge about the solvency situation of the company. In the given case,
the debt to Equity is 3 times which more than the generally accepted standard (Squires and
Heurkens 2014).
Debt Leverage
Equity $314,077
Debt $942,232
Debt Leverage 3
In the given case, the IRR or the internal rate of return is calculated for understanding
the percentage of the profitability of the investment appraisal. The IRR calculated with two
assumptions where the advantage is the variants. It can be seen that the result is in negative
(Leigh and Blakely 2016).
Leverages IRR
Particulars 0 1 2 3 4 5
Cash Flow
-
$1,256,3
09 $275,448 280957 286576 292308 298154
LESS:
OPEX $86,700 88434 90203 92007 93847
Capex $99,000 100980 103000 105060 107161
Debt Service
Coverage $69,434 $69,434 $69,434 $69,434 $69,434
Net Cash Flow $20,314 $22,109 $23,940 $25,808 $27,713
Discounting
Factor
0.925925
926
0.857338
820
0.793832
241
0.735029
853
0.680583
197
Discounted Cash
Flow
-
$1,256,3
09 18810 18955 19005 18969 18861
Irr -51%

6FINANCE
Unlevered IRR
Particulars 0 1 2 3 4 5
Leverages IRR
Cash Flow
-
$1,256,3
09 $275,448 280957 286576 292308 298154
LESS:
OPEX $86,700 88434 90203 92007 93847
Capex $99,000 100980 103000 105060 107161
Net Cash Flow $89,748 $91,543 $93,374 $95,241 $97,146
Discounting
Factor
0.925925
926
0.857338
820
0.793832
241
0.735029
853
0.680583
197
Discounted Cash
Flow
-
$1,256,3
09 83100 78483 74123 70005 66116
IRR -31%
Conclusion:
In the given case the profitability of the project is negative and it is not worth
investing. The only matter of concern is that the decision is the IRR effect. Irrespective of the
fact, the debt service coverage and the debt to equity are very high as compared to the normal
standards.

7FINANCE
Reference
Aalbers, M.B., 2016. The financialization of home and the mortgage market crisis. In The
Financialization of Housing(pp. 40-63). Routledge.
Cerutti, E., Dagher, J. and Dell'Ariccia, G., 2017. Housing finance and real-estate booms: a
cross-country perspective. Journal of Housing Economics, 38, pp.1-13.
Cerutti, E., Dagher, J. and Dell'Ariccia, G., 2017. Housing finance and real-estate booms: a
cross-country perspective. Journal of Housing Economics, 38, pp.1-13.
Leigh, N.G. and Blakely, E.J., 2016. Planning local economic development: Theory and
practice. SAGE publications.
Mera, K. and Renaud, B., 2016. Asia's financial crisis and the role of real estate. Routledge.
Rouanet, H. and Halbert, L., 2016. Leveraging finance capital: Urban change and self-
empowerment of real estate developers in India. Urban Studies, 53(7), pp.1401-1423.
Schwartz, A.F., 2014. Housing policy in the United States. Routledge.
Squires, G. and Heurkens, E. eds., 2014. International approaches to real estate
development. Routledge.