CONFIDENTIAL, APIDEC 2018/RES511 UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION COURSE INVESTMENT APPRAISAL. COURSE CODE RES511 EXAMINATION : DECEMBER 2018 TIME * : 3HOURS INSTRUCTIONS TO CANDIDATES, 1 This question paper consists of two (2) parts: PART A (2 Questions) PART B (2 Questions) 2. Answer ALL questions from Part A and Part B in the separate Answer Booklets. Start each answer on a new page. 3. Do not bring any material into the examination room unless permission is given by the invigilator. 4. Please check to make sure that this examination pack consists of : i) the Question Paper ii) two Answer Booklets ~ provided by the Faculty ii) Parry's Valuation and Conversion Table — provided by the Faculty iv) agraph paper — provided by the Faculty 5. ‘Answer ALL questions in English. DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO This examination paper consists of 6 printed pages (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL, 2 APIDEC 2018/RES511 PARTA QUESTION 4 a) Briefly explain the following terms: i) Real assets and financial assets (3 marks) ii) Investment decision and financial decision (3 marks) ill) Systematic risks and unsystematic risks (3 marks) iv) Investor's cost of capital and required return (IRR) (3 marks) b) An investor has identified an investment opportunity in 60 year leasehold free standing hyper market located in a prominent city offered for sale at RM50,000,000.00. The building is recently leased to a foreign hyper market operator for 10 years at a passing rent of RM250,000.00 per month FRI. The current rental value of the subject property is RM350,000.00 per month FRI and the lease is due for next rent revision in 5 years' time. A similar freehold property fully let on similar rent review patterns, has just been sold on a basis of a 6% capitalization rate. Value the property using the following methods: i) Conventional leasehold dual rate method using sinking fund @ 2.5% & tax @ 30%. (3 marks) li) Leasehold single rate methods. (6 marks) iii) Discuss the anomalies of the two (2) methods in the leasehold valuation practice. (4 marks) © Hak Cipta Universiti Teknologl MARA CONFIDENTIAL,CONFIDENTIAL 3 APIDEC 2018/RES511 QUESTION 2 X-REIT has recently acquired a lease of a 3 hectare industrial land from an institution for RM20,000,000.00 for a tenure of 50 years. It proposed to develop the land into an industrial facility comprising a manufacturing plant cum office building with a gross built up area of 180,000 square feet. The overall costs of development is estimated at RM75,000,000.00. The proposed development is expected to be completed in 24 months. This proposed “build to suit” project is to serve the operations of an aerospace industry on a fixed 20 year lease with rent review every 5 years. The estimated market rental value of the property is RM558,000.00 per month. Rental growth of 5% is forecast after allowing depreciation. The annual operating expenses are expected to be RM1,300,000.00. The expected net yield is 7% and inflation in costs will run at 3%. X-REIT has indicated that the financing arrangement will be 70% through bank borrowing The remaining 30% is REIT’s equity capital. The fixed interest rate on debt is 9% p.a. The investor's target overall investment period is 20 years. The investor's required return is 12%. Based on the above information, you are required to calculate the followings: a) Produce a projected cash flow for the 20 year lease period. (10 marks) b) Calculate the Net Present Value (NPV) and Internal Rate of Retum (IRR). (10 marks) ©) Advise X-REIT on the viability of the proposed investment. (6 marks) (© Hak Cipta Universiti Teknolog! MARA CONFIDENTIAL,CONFIDENTIAL 4 APIDEC 2018/RES511 PARTB QUESTION 1 A property investor was offered to invest in one of the following locations: Location A is in Selangor, requiring a capital of RM28,000,000.00; Location B is in Penang with RM32,000,000.00 capital and Location C is in Kuala Lumpur which requires the least capital at RM25,000,000.00. While each location requires different amount of capital the return would depend on the market performance of the respective property in the next 2 to 3 years which would either maintain or becomes worse than what it is now. For Location A, it is anticipated that there would be a 60% chance that the market would maintain and the return on the investment would be 8% on the capital invested. What is worrying the investor is that if the market becomes worse the rate of return would drop to only at 6% of the capital invested For Location B, there is only a 40% chance that the market would maintain and return would be at 10% of capital invested. However, if the markets worsen, the return would only be 4.5% of capital invested, For Location C, the expected retum is only 7% on capital invested. However, the market performance of residential property is the most promising with 85% chance of maintaining the condition. If the market does not maintain though, the expected return would be 5% of capital invested. With reference to the above information, answer the followings: a) Draw a decision tree to represent the above scenario. (8 marks) b) Determine the best option if the investor is an optimistic investor. (2 marks) ©) Advise the investor on the best option to choose if we use the Expected Monetary Value (EMV) and Expected Opportunity Loss (EOL) approach respectively. (15 marks) QUESTION 2 Berani Sdn Bhd is planning to develop a vast track of land in Kuala Selangor. The size of the land is 50 acres and has the potential to be developed into semi-detached and bungalow houses. Based on their feasibility studies, the land to be allocated for semi-detached houses shall not constitute less than half of the total amount of land. (© Hak Cipta Universiti Teknolog! MARA CONFIDENTIAL,CONFIDENTIAL, 5 APIDEC 2018/RES511 Besides this, you have also been furnished by the following requirements: i) An acre of land shall be developed into 12 units of semi-detached or 10 units of bungalow houses. ii) The total cost of building one unit of semi-detached house is RM150,000.00 while for a bungalow RM200,000.00. ili) The selling price of semi-detached and bungalow houses are RM300,000.00 and RM500,000.00 respectively. iv) The developer has 18 months to complete the development. v) The developer has a capital ceiling of RM90,000,000.00. vi) Based on previous experience, on average 30 units of semi-detached houses can be constructed in a single month whilst for bungalows only 20 units per month due to labour shortage. Based on the above information, answer the question below using Linear Programming method. a) Identify the variables in the above problem. (2 marks) b) Formulate the objective function. (2 marks) ¢) Formulate the constraint equations. (6 marks) d) Using a graphical approach, determine the value of the two types of houses in order to maximize profit. (15 marks) END OF QUESTION PAPER (© Hak Cipta Universiti Teknolog! MARA CONFIDENTIAL,