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(Solved) Problem 1: Assume that you are an investment analyst preparing an analysis of an investment opportunity for a client.


Problem 1:

Assume that you are an investment analyst preparing an analysis of an

investment opportunity for a client. Your client is considering the acquisition

of an apartment complex from a developer at the point in time when the

apartments are ready for first occupancy. Your have developed the following

information.

 

1) Number of units = 30

2) First year market rent per unit = $480 per month

3) Rent is projected to increase by 8% each year

4) Annual vacancy rate = 3% of PGI

5) Annual collection loss = 2% of PGI

6) Annual operating expense = 34% of EGI

7) Miscellaneous yearly income (parking and washers/dryers) = $1000

8) Monthly miscellaneous income is expected to remain constant

9) Purchase price = $1,800,000

10) Estimated value of land = $300,000

11) Anticipated mortgage terms:

a) Loan to value ratio = .80

b) Interest rate = 6.5%

c) Years to maturity = 25

d) Points charged = 3

e) Prepayment penalty = 2% of outstanding balance

f) Level payment, fully amortized

g) Fixed interest rate, annual payments2

12) Anticipated holding period = 4 years

13) Proportion by which property is expected to appreciate during the

holding period -- 5% a year

14) Estimated selling expenses as proportion of future sales price = 5%

15) Marginal income tax rate for the client = 28%

16) It is assumed that the property is put into service on January 1st and

sold on December 31st

17) Assume the client is "active" in the property management

18) It is assumed that the client has an adjusted gross income of $95,000

and has no other passive income not offset by other passive losses (for

each year of the anticipated holding period)

19) Client's minimum required after tax rate of return on equity = 13%

 

Calculate:

 

a. The before-tax and after-tax cash flows for each year of the holding

period and the before-tax and after-tax equity reversion.

 

b. The after-tax net present value and after-tax internal rate of return to

the investor.

 

c. The profitability index (this is calculated on an after-tax basis).

 

d. Should we invest in this project? Explain.

 

Problem 2:

Assume that you were given an opportunity to purchase a real estate project

using an equity participation loan. The NOI for each year of the holding period

are shown below:

 

NOI

Year 1 124,787

Year 2 132,225

Year 3 139,954

Year 4 148,468

 

Annual payments are being used to make the problem easier!

 

Additional information:

1) Purchase price = $1,900,000

2) Estimated value of land = $500,000

3) Anticipated mortgage terms:

a) Loan to value ratio = .80

b) Interest rate = 5.5%

c) Years to maturity = 25

d) Points charged = 3

e) Prepayment penalty = 2% of outstanding balance

f) Level payment, fully amortized

g) Fixed interest rate, monthly payments

4) Participation terms:

a) Share of NOI = 17.5% over $130,000

b) Share of Appreciation = 20%

5) Future sales price = $2,350,000

6) Estimated selling expenses as proportion of future sales price = 5%

7) Client's minimum required before-tax rate of return on equity = 12%

 

Calculate:

 

a. The before-tax cash flows and the before-tax equity reversion (you do

not need to calculate the after-tax cash flows or reversion).

 

b. The before-tax net present value to the investor.


(PLEASE READ!!!)

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