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Case 2: Health Development Corporation HBS 9-200-049
1. Did the purchase of the Lexington Club real estate increase the value of Heatlh Development Corporation (HDC)? Calculate the NPV of the purchase.
• Use pre-tax cashflows.
• Assume the revenues of the Lexington Club grow by 5% per year.
• Assume that the appropriate discount rate for real estate cashflows was 10%.
• Assume a 20 year life of the facility.
(Hint: In calculating the NPV of the decision to buy the real estate, you only need to consider the incremental cashflows resulting from the decision).
NPV=
=11203677.75 – 6,500,00
= $4,703,677.75
Assumptions:
• The change in incremental cash flow can be examined through looking at the factors causing change in operating income – in this case only the lease cost is different.
• The interest repayments are a cost of capital, rather than a cost of operating, and are accounted for in the $6.5 million as a perpetuity outflow of $504,000......
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Title: Hdc Case
Approximate Word Count: 557
Approximate Pages: 3 (250 words per double-spaced page)
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