BMBA 508: You are chief executive of a company and are prepared to invest in assets with a total value of no more than $10,000,000: Finance, Individual Assignment, UO, NZ

You are chief executive of a company and are prepared to invest in assets with a total value of no more than $10,000,000. You will obtain equity from shareholders to the extent that is required.

You have identified some investment options that you feel are worth investigating further.

Your business does not currently have a treasury policy so there are no guidelines as to what extent you might employ debt to fund assets and investments.

These options are as follows:

Option 1 Subdivision of commercial land

• $5,000,000 total investment cost
• Expected sales value on completion $8,000,000
• 18 month project
• $2,000,000 up front and the balance evenly spent over the remaining months
• Bank will fund up to 60% of acquisition and construction costs. You are comfortable with this level of bank debt
• Interest rate on debt 8.5%, paid monthly

Option 2 Commercial investment property

• $5,000,000 purchase price
• 8% yield on net rents
• Bank will fund a maximum of 60% of purchase price
•  Interest rate 7%
• P&I amortised over a 15 year term until loan is at 50% LVR
•  5 yearly rent reviews, expect rent increase of 10% per rent review
• Expect yield to remain at 7.5% into the future
• Consider a sale at the end of year 10

Option 3 Townhouse development

•  $5,000,000 investment cost
• 2 year project
• $1,000,000 up front and the balance evenly over the term of the project
• Bank will fund up to 65% of acquisition and construction costs
•  Revenue on completion of $7,500,000
• Interest can be capitalised to the loan
•  Interest rate 8%

Option 4 Business acquisition

• EBIT per financial information supplied is $750,000
• Depreciation is $50,000 
•  Financial information does not include rent on a factory owned by the vendor. Market rent is $100,000 
•  Average capital expenditure is $100,000
• The business can be brought for an Earnings Multiple of 4 times future maintainable earnings (FME) 
•  Working capital required is stock $200,000, Debtors $150,000, Accounts payable $50,000
•  The bank will provide debt at 1.5 times EBITDA rounded to the nearest hundred thousand
• Interest rate is 8% interest only

Required

Prepare a report that considers the investment options available to your company and any other matters you feel are appropriate. This should be in PDF and in a format that is appropriate for review by your Board. Marks will be given for structure, format and presentation, along with how well it responds to your Board’s desire for guidance around investment decisions.