SIGMA PROPERTY

MANAGEMENT,
INC.

Antonio, Kattee G.
Cuntapay, Phoebe A.
Lopez, Zenith Kim P.
Tuala, Kaylor Ann
 Background of the Study

Sigma Property Management, Inc. was first established in the year 1976 by spouse
David Sanvictore and Magdalena Sanvictores. It is a family-owned corporation that engages in
a real estate operations such as buy and sell, rentals and leases of residential properties. By the
year 2000, Mariella and Anton, took over the company after their parents went to semi-
retirement. Both have a degree that is beneficial for the company. Mariella Salonga is an MBA
graduate from the University of the Philippines, she is in charge in evaluating potential
investments and marketing operations. Meanwhile, Anton Sanvictores is a Civil Engineer, he is
in charge of daily operations and administration.

On the 15th of every month, it is time for Mariella and Anton to update their parents
concerning the status of the business operation. It is the venue for Mariella to present some
potential investment properties. The company policy requires that the approval of both David
and Magdalena Sanvictores is needed for an investment that is above the worth of five hundred
thousand pesos (500,000).
ALTERNATIVE I: SELL THE HOUSE IMMEDIATELY

BASED ON EARNINGS
Selling Price 1,300,000.00
Cost
Acquisition Cost 750,000.00
Renovation Cost 350,000.00
License & Taxes 123,529.41
NET INCOME 76,470.59

PAYBACK PERIOD
Selling Price 1,300,000.00
License & Taxes 104,524.89
Cash Inflow 1,195,475.11

PAYBACK PERIOD 0.920136

NET PRESENT VALUE

Cash Inflow 1,195,475.11
COI 1,100,000.00

Net present value 95,475.11

IRR
Annual Cash Inflow 1,195,475.11
COI 1,100,000.00
PVFA 0.92
Term 1 year

IRR 6%-8%
 ALTERNATIVE II: RENT/LEASE THE HOUSE

BASED ON EARNINGS
Year 1 Year 2 Year 3 Year 4 Year 5

Rental Income 120,000.00 132,000.00 145,200.00 159,720.00 175,692.00

Depreciation 44,000.00 44,000.00 44,000.00 44,000.00 44,000.00
(1,100,000*40%)/1
0
Cost of Land
Operating Expense 12,000.00 13,200.00 14,520.00 15,972.00 17,569.20
Operating Income 64,000.00 74,800.00 86,680.00 99,748.00 114,122.80
Income Tax 20,480.00 23,936.00 27,737.60 31,919.36 36,519.30
Gain
NET INCOME 43,520.00 50,864.00 58,942.40 67,828.64 77,603.50

Year 6 Year 7 Year 8 Year 9 Year 10 Year 10 TOTAL

(Sale of
Land)
193,261.20 212,587.32 233,846.05 257,230.66 282,953.72 1,000,000.00
44,000.00 44,000.00 44,000.00 44,000.00 44,000.00

450,000.00
19,326.12 21,258.73 23,384.61 25,723.07 28,295.37
129,935.08 147,328.59 166,461.45 187,507.59 210,658.35
41,579.23 47,145.15 53,267.66 60,002.43 67,410.67
550,000.00
88,355.85 100,183.44 113,193.78 127,505.16 143,247.68 1,421,244.46

PAYBACK PERIOD
Year 1 Year 2 Year 3 Year 4

Net Income 29,240.00 36,584.00 44,662.40 53,548.64

Depreciation Expense 65,000.00 65,000.00 65,000.00 65,000.00
Cash Inflow 94,240.00 101,584.0 109,662.40 118,548.64
 0
Cummulative Cash 94,240.00 195,824.0 305,486.40 424,035.04
Inflow 0

Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 10

(Sale of
Land)
63,323.50 74,075.85 85,903.44 98,913.78 113,225.16 128,967.68 1,000,000.0
0
65,000.00 65,000.00 65,000.00 65,000.00 65,000.00 65,000.00  
128,323.5 139,075.8 150,903.4 163,913.78 178,225.16 193,967.68 1,000,000.0
0 5 4 0
552,358.5 691,434.4 842,337.8 1,006,251.6 1,184,476.7 1,378,444.4 2,378,444.4
4 0 4 2 8 6 6

Payback Period 8.53

NET PRESENT VALUE

Year 1 Year 2 Year 3 Year 4 Year 5
Cash Inflow 73,240.00 80,584.00 88,662.40 97,548.64 107,323.50
PV Factor @ 11.25% 0.8989 0.8080 0.7263 0.6528 0.5868
Present Value 65,833.71 65,110.16 64,393.11 63,682.65 62,978.85

Year 6 Year 7 Year 8 Year 9 Year 10 Year 10

118,075.85 129,903.44 142,913.78 157,225.16 172,967.68 1,000,000.00
0.5275 0.4741 0.4262 0.3831 0.3443 0.3443
62,281.77 61,591.46 60,907.95 60,231.25 59,561.38 344,349.77
Total PV of
Cash Inflows 970,922.07

COI 1,100,000.00
Net present
value -129,077.93
 IRR

Year 1 Year 2 Year 3 Year 4

Cash Inflow 94,240.00 101,584.00 109,662.40 118,548.64
Average Annual Cash Inflow 237,844.4463

Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 10

128,323.50 139,075.85 150,903.44 163,913.78 178,225.16 193,967.68 1,000,000.00

PVFA 4.62

Term 10 years

IRR 17%-18%
 ALTERNATIVE III: RENT THE HOUSE THEN SELL

BASED ON EARNINGS

Year 1 Year 2 Year 3 Year 3 Total

(Sale of
Property)
Rental Income 120,000.00 132,000.00 145,200.00
Selling Price 2,600,000.00

Depreciation 65,000.00 65,000.00 65,000.00

Operating 12,000.00 13,200.00 14,520.00
Expense
Carrying Value 905,000.00
License and       273,000.00
taxes
Operating 43,000.00 53,800.00 65,680.00
Income
Income Tax 13,760.00 17,216.00 21,017.60  
Net Income 29,240.00 36,584.00 44,662.40 1,422,000.00 1,532,486.4
0

PAYBACK PERIOD

Year 3
Year 1 Year 2 Year 3 (Sale of Property)
Net Income 29,240.00 36,584.00 44,662.40 2,327,000.00
Depreciation Expense 65,000.00 65,000.00 65,000.00
Cash Inflow 94,240.00 101,584.00 109,662.40 2,327,000.00
Cummulative Cash
Inflow 94,240.00 195,824.00 305,486.40 2,632,486.40
Payback Period 3.00

NET PRESENT VALUE

Year 3
(Sale of
Year 1 Year 2 Year 3 Property)
Cash Inflow 94,240.00 101,584.00 109,662.40 2,327,000.00
PV Factor 0.8989 0.8080 0.7263 0.7263
Present Value 84,710.11 82,077.72 79,644.85 1,690,037.43

Total Cash Inflow 1,936,470.11

COI 1,100,000.00

Net present value 836,470.11

IRR
Year 3
Year 1 Year 2 Year 3 (Sale of Property)
Cash Inflow 94,240.00 101,584.00 109,662.40 2,327,000.00

Average Annual Inflow 877,495.4667

PVFA 1.25

Term 3 year 3

IRR 60-61%
GUIDE QUESTIONS
1. Which of the alternatives cited in the case will maximize the earning capability of the
property?
Based on the facts stated in this case and as shown in the computed net income of each
alternative which is 76,470.59, 1,421,244.46, 1,532,486.40 respectively. Alternative 3 has the
highest net income among the alternatives that would indicate a good rate of return on an
investment. Another factor that we have considered is the payback period. Alternative 1 has
only 0.95, as compared to Alternative 2 and 3 which is 8.53 and 3 respectively, this is
acceptable because it earns back the invested amount faster but the amount to be recovered is
only 63,500 which lower than Alternative 3. The company does not set a standard time hence
payback period for Alternative 3 is only 3 years which is lesser than the half of the useful life of
the proposed capital investment project. Therefore, among the alternatives given, Alternative 3
is the most favorable alternative that will maximize the earning capacity of the property invested.

2. Based on your calculations, which of the alternatives cited above would result to the
most favorable rating on the financial feasibility criteria of the company?
With the 3 alternatives mentioned above the alternative 3 is the most favorable because
according to the company’s criteria the net present value should be positive which is amounted
to 836,470.11, and the rate of return which is 60%-61% which is more than 5 times higher than
the said weighted average cost of capital (11.25%)

3. Based on your analysis and the feasibility criteria enumerated by Mrs. Magdalena
Sanvictores, will you recommend the acquisition of the property to Mariella Salonga?

The computation shows that the proposed acquisition will result to a positive net
present value, meaning the present value of cash outflows exceeds the present
value of cash inflows which is desirable for the business. And the rate of return is
higher than the WACC, meaning if IRR is greater than or equal to the firm’s cost
of capital the project of acquisition should be accepted . We recommend that
Mariella Salonga should push through with the proposed acquisition of the
property.
4. Aside from the result of the financial analysis, what other factors would you consider in
evaluating the potential property?
Aside from the financial analysis that we have made, we think that we should also
consider the cash flow once the property will be acquired. We should be able to foresee if the
expenses in renovating the property will not overlap the income that we can get once we
decided to buy it. In acquiring the property. We also need to consider its fix and variable
expenses like the insurance and property tax. We have to keep an eye on the property tax
because it can be higher depending on the changes in local market economy. To add that, it
directly affects the net cash flow we can produce out of the property if we decided to acquire it.
Aside from the above listed factors, the current condition of the property market must also be
evaluated. It is because property market changes from time to time. In this case, it can help
Mariella in better understanding the economic factors that drive the property market.
5. Aside from the alternatives already presented in the case, are there other ways of extending
the earning capabilities of this potential investment?
Aside from the alternatives that was presented, we think that one way to extend the
earning capability of the property is to make the house available as a rent to own. There will be
a contract between Mariella and the potential consumer in which the consumer can choose
which contract to enter to, whether lease-option contract or the lease-purchase agreement. In
lease option contract, the consumer is not mandated to buy the property when the contract
expires. While in the lease-purchase is that the buyer is mandated to buy the property. Through
it, Sigma Company can use it as a way to decide thoroughly for the value of the property that
will be sold. Another alternative is putting the property into auction. The goal here is to draw
attention to the property and encourage buyers to outbid one another.
In doing so, we think that a good marketing strategy would be a great help for them to
extend the earning capability of the property. They can improve the ambiance of the property for
it to attract more potential customers. By doing it, they can have a green space for the house.
They should know their target market so that when the renovation comes, it will be easier for
them.

6. Based on the above questions, what will be your final recommendation to Mariella Salonga?
In evaluating the investment in the property that we are doing, we have to meticulously
and thoroughly look into the factors and alternatives. Upon making a decision in investing
something, we should not just consider how a property will be profitable few years from now but
also the costs that we will incur just to make it happen. Simply because there are instances
wherein the costs overlap the profit, in which, we need to avoid. In this case, the decision of
Mariella Salonga should not just focus on the location of the property but on how it will be
profitable, too. With the financial analysis that was presented and the different factors that was
considered, we think that Mariella should choose the Alternative 3. Due to the reason that
among the three alternatives that was presented, by choosing alternative 3, your amount
recovery is much bigger compared to the two. It’s payback period is also indicating that it has
only 3 years. Thus, it only means that it is attractive enough to invest with. It also means that the
Sigma Property Management Inc. can recoup their investment in a short period of time. Its
Internal Rate of Return (RRR) is the most favorable compared to the other two alternatives. It
has the highest IRR thus making it desirable for investment. By choosing the alternative 3, we
do think that it is the most beneficial way for their company to maximize their profit.
 SUMMARY OF FINDINGS

Investing in a potential property requires you to have a thorough financial analysis and
acknowledging the different factors that might affect your business. With the case of Sigma
Corporation, we have considered to compute the Based on Earnings, Payback Period, Net
Present Value and the IRR of the three alternatives that was presented. It was shown in our
computation that it is Alternative 3 who has the highest Based on Earnings, with the total of 1,
532,486. While the payback period of Alternative 1 is 0.92, Alternative 2 is 8.53 and Alternative
3 is exactly 3. It is also alternative 3 that garnered the highest Net Present Value with the
amount of 836, 470, wherein in Alternatives 1 and 2 have only 95, 475 and -129,077,
respectively. Lastly, Alternative 3 has also the highest IRR with an approximate percentage of
60-61%. Alternative 1 has only 6-8% and Alternative 2 has a 17-18%.
Hence, we conclude that Alternative 3 is the most beneficial way for Sigma Company to
maximize their earning capabilities. Upon reviewing the evaluations needed for the property
before acquiring, this alternative can make the investment profitable. It is all about taking the
risks and foreseeing the future of the investment. Because regardless of these risks that were
presented on the problem, they can still compensate their expenses with a proper management
that can later on be useful in their business operation