A Case on Simulation of Project Cash Flows - NS Workspaces - Science and Maths Assignment Help

Assignment Task:

NS Workspaces is a fully owned subsidiary of NS Infrastructure and Services Ltd, popularly known as NSIS.  NSIS has set up NS Workspaces exclusively for the purpose of entering into office workspaces. They have received approval from the Andhra Pradesh State government to set up a large facility and was allotted land in the new software park being established.  The land was allotted on a 33 year lease at a very nominal rate. NSIS has set up the fully owned subsidiary in order to protect itself and its investors from any downside risk inherent in the real estate industry, especially in office space sector. It is more so because, as per the agreement with the Government of Andhra Pradesh,  NS Workspaces cannot sell the built-up area, but can only earn revenue by renting or leasing the office space.    

NS Workspaces entered into an agreement with another sister concern, NS Constructions India Ltd (NSCIL), which specializes in real estate, to build the office space.  NSCIL agreed to carry out the construction at their cost and NS Workspaces will make the entire payment when they take over the building. NSCIL specializes in pre-fabricated construction technology and consequently, the entire construction can be completed in less than 6 months.

NS Workspaces is planning to construct a building with 180,000 Sq ft.  The initial estimates suggested that the entire building will cost Rs. 288 million, at an average cost of Rs. 1600 per Sq. ft.  NS Workspaces is planning to take out a mortgage for 85 percent of the cost of the building. Axis Bank, the primary bankers of NSIS have agreed to advance the loan at a fixed rate of 12 percent for a 30 year term.  NS Workspaces has calculated that the equated monthly instalments on this loan will be Rs. 2,518,043. On this basis, NSIS calculated that they will be paying Rs. 888,328 towards principal and Rs. 29,328,195 towards interest in the very first year.

NS Workspaces will also have to pay for the operation, maintenance and utilities of the building.  The initial estimates indicated that the these operation and maintenance costs will be Rs. 24.40 per Sq. ft. the total operating cost in the first year will be Rs. 4,392,000.  

For the purpose of revenue calculations, NS Workspaces assumed that the average rent per Sq. ft. in the neighbourhood will be Rs. 180.  They had estimated that they will receive a rental income of Rs. 32.4 million, if the space is fully occupied. Dhanvin, who is the managing director of NS Workspaces rightly concluded that the occupancy rate in the very first year will be much less.  His marketing team was very optimistic that the vacancy rate in the first year will be 30 percent of the total area. Dhanvin quickly calculated that the company will receive an estimated gross annual rental income of Rs. 22.68 million, based on the estimates of the marketing team.

Dhanvin is concerned that the “before-tax-cash-flow” in the first year will be substantially negative.  He is also aware that the taxable income will be much less (i.e, much more negative). Nevertheless, he can take some comfort from the fact that when the parent company (NSIS) takes the loss into its consolidated accounts (consolidated across all the companies owned by NSIS) there will be reduction (or saving) in terms of the taxes payable at the parent company level.  He decided to take credit of the tax saving while calculating his (NS Workspaces’) “after-tax-cash-flow”. In a convoluted way, he is happy that the effective tax rate for the parent company is 34 percent.

Dhanvin reviewed the entire cash flow calculations.  He knew that there are many uncertainties involved in the project.  At the same time there are some certainties. The size of the workspace is fixed at 180,000 Sq. ft. and there is no uncertainty about it.  Similarly, the agreement with Axis Bank has a fixed tenure of 30 years and the borrowing is also at a fixed rate of 12 percent. At the same time, the amount to be borrowed depends on the actual cost of construction of the office space.  On the other hand, he felt that he needed to identify various factors that are not certain so that he can understand the risks involved in the entire project. He asked his executive assistant, Bhramara, to work out the formulae for calculating the “before-tax-cash-flow” and “after-tax-cash-flow” so that the uncertainties can be factored into the calculations.  He was very particular that these formulae should define all the variables and contain only those numbers where there are no uncertainties.

Carry out the simulation for the FIRST YEAR only.  Calculate the probability distribution for BTCF for the first year only.  Decide on what is the appropriate number of cycles (simulations). Explain the rationale for this number.

Calculate the averages and standard deviations of BTCF, Building cost per Sq. ft., Rent, Operating Expenses and Vacancy based on the simulations.

Answer the following questions based on your simulations.

1. What is a 95% confidence interval for the average of BTCF?

2. What is the probability that the mean BTCF is greater than zero? 

3. What is the probability that the BTCF in the very first year will be non-negative?

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