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Posted on Oct 04, 2024

2. Apply capital budgeting to property investment (a) Develop proforma cash flows for property investment project (b) Compute NPV, R (c) Develop Problem Solving and

2. Apply capital budgeting to property investment (a) Develop proforma cash flows for property investment project (b) Compute NPV, R (c) Develop Problem Solving and Critical Thinking Skills 1) buy house in all Cash Or Mortgage; project period-15 years 5) Rent-to-Price Ratio 2) property value 3) down payment $200,000 $50,000 6) inflation, rental, property value appreciation 7) sell the property at the end of 15th year 8) annual rental income 4) 10-yr mortgage at 3.5% ($18,036) case 1: Investment NPV IRA CFO CF1 CF2 CF3 C14 CFS CF6 CF7 CF10 CF11 CF12 (F13 CF14 CF15 (NO inflation, rental property value oppreciation) Xxxxxx Xxxxxx 1,944 1,944 xxXxxXxxXxx XXXXX xxxxxx xxxxxx -50,000 200,000 1.364 1,364 20,000 20,000 Xxxxxx 1,964 20,000 20,000 20,000 20,000 20,000 20,000 20,000 xXxxxx 20.000 20,000 xXxxxx xxxxxxxx xxxxx 20,000 20,000 20.000 20,000 20,000 220,000 xxxxxx Use IRR to compare Cash vs Mortgage? With all cash buying, all the return of the property (from rental) is earned and not offetted by mortgage cast, hence Cash better than Mortgage? At required return 5%, find NPV to compare Cash vs Mortgage (mutually exclusive), conclusion consistent with R How about required rate 4%, regired rate 3.5%, required rate 3%, etc, disons your finding xxxxxx xxxxxx xxxxxx Xxxxxx 24,380 24,067 25.365 xxxxxx xxxxxx 50,000 1,964 2,364 -200,000 20,000 20,400 "growing rentals 20,000 20,400 20,808 2,772 xxxxxxX xxxxxxx 20,800 21,224 21,449 22,082 22,323 21,224 21,649 22,082 22,523 22,974 23,433 23,902 24,380 24,867 25,365 25,872 295,543 22,974 23,433 23,902 24.300 24.867 25,365 25,872 26,390 Now assume rental grows with inflation, does your conclusion change? Use your numbers to find support for "Rental is a hedge against inflation". (18.036) (18.00) (18.036) (18.036) (18.036) (18.036) (18.036) 0 0 0 200.000 10000 (18,036) 50,000 (18,036) (18.036) D 0200,000 0 -200,000 tab 042 (WITH inflation, rental, property value appreciation) 10000 Qas case 2: Ownership XXXXXXX XXXXXXX xxxxxxXx CFB NOT 2.00% $20,000 60 0 D 0 ose 1 vitment NPV CFO 092 CFS CFS CF7 CF10 CF11 CF12 CF13 CFB CF9 xxxxxxx xxxxxx 10000 xxxxxx xxxxx xxxxxx -50,000 1,944 2,364 -200,000 20,000 20,400 2,372 20,800 xxxxx 24.380 24,867 25.345 21,224 21,649 22,082 22,521 22,974 21,433 23,302 24,30 24,867 25.365 25,872 295,341 21,224 21,649 22.082 22,323 22,974 21,413 21,902 24,380 24.867 25,365 25,872 26,390 growing rental 10,000 20,400 20,308 Now asume rental grows with inflation, does your condusion change? Use your numbers to find support for Rental is a hedge against inflation 10000 (180)(1803) (18.036) (18.036) (18.0) (0) 0 50,000 (18,016) (18.086) (18.6M) -200,000 200,000 10000 0 0 D D 0 200,000 You buy the house just for self-use. What's your condusion now based on explain on Now go back to case 1, think about areas with lower Rent-to-Price Ratis, such an San F, NYC Try 1%, 35% and a even lower Rent-to-Price ratio, discuss your findings Discus/digest/summarize your d-Than findings so far. CLAS QRT (optional) Summarie any additional insights you may have figured from this awarcise (eg, at a different inflation rate, you play with the Exc ONS case 2: Ownershi HO 188 10 CF4 xxXxxxXxXx CF xxxxxXxXx 0 D 0 0 CF14 CF15 xxxxxx xxxxxxX 2. Apply capital budgeting to property investment (a) Develop proforma cash flows for property investment project (b) Compute NPV, R (c) Develop Problem Solving and Critical Thinking Skills 1) buy house in all Cash Or Mortgage; project period-15 years 5) Rent-to-Price Ratio 2) property value 3) down payment $200,000 $50,000 6) inflation, rental, property value appreciation 7) sell the property at the end of 15th year 8) annual rental income 4) 10-yr mortgage at 3.5% ($18,036) case 1: Investment NPV IRA CFO CF1 CF2 CF3 C14 CFS CF6 CF7 CF10 CF11 CF12 (F13 CF14 CF15 (NO inflation, rental property value oppreciation) Xxxxxx Xxxxxx 1,944 1,944 xxXxxXxxXxx XXXXX xxxxxx xxxxxx -50,000 200,000 1.364 1,364 20,000 20,000 Xxxxxx 1,964 20,000 20,000 20,000 20,000 20,000 20,000 20,000 xXxxxx 20.000 20,000 xXxxxx xxxxxxxx xxxxx 20,000 20,000 20.000 20,000 20,000 220,000 xxxxxx Use IRR to compare Cash vs Mortgage? With all cash buying, all the return of the property (from rental) is earned and not offetted by mortgage cast, hence Cash better than Mortgage? At required return 5%, find NPV to compare Cash vs Mortgage (mutually exclusive), conclusion consistent with R How about required rate 4%, regired rate 3.5%, required rate 3%, etc, disons your finding xxxxxx xxxxxx xxxxxx Xxxxxx 24,380 24,067 25.365 xxxxxx xxxxxx 50,000 1,964 2,364 -200,000 20,000 20,400 "growing rentals 20,000 20,400 20,808 2,772 xxxxxxX xxxxxxx 20,800 21,224 21,449 22,082 22,323 21,224 21,649 22,082 22,523 22,974 23,433 23,902 24,380 24,867 25,365 25,872 295,543 22,974 23,433 23,902 24.300 24.867 25,365 25,872 26,390 Now assume rental grows with inflation, does your conclusion change? Use your numbers to find support for "Rental is a hedge against inflation". (18.036) (18.00) (18.036) (18.036) (18.036) (18.036) (18.036) 0 0 0 200.000 10000 (18,036) 50,000 (18,036) (18.036) D 0200,000 0 -200,000 tab 042 (WITH inflation, rental, property value appreciation) 10000 Qas case 2: Ownership XXXXXXX XXXXXXX xxxxxxXx CFB NOT 2.00% $20,000 60 0 D 0 ose 1 vitment NPV CFO 092 CFS CFS CF7 CF10 CF11 CF12 CF13 CFB CF9 xxxxxxx xxxxxx 10000 xxxxxx xxxxx xxxxxx -50,000 1,944 2,364 -200,000 20,000 20,400 2,372 20,800 xxxxx 24.380 24,867 25.345 21,224 21,649 22,082 22,521 22,974 21,433 23,302 24,30 24,867 25.365 25,872 295,341 21,224 21,649 22.082 22,323 22,974 21,413 21,902 24,380 24.867 25,365 25,872 26,390 growing rental 10,000 20,400 20,308 Now asume rental grows with inflation, does your condusion change? Use your numbers to find support for Rental is a hedge against inflation 10000 (180)(1803) (18.036) (18.036) (18.0) (0) 0 50,000 (18,016) (18.086) (18.6M) -200,000 200,000 10000 0 0 D D 0 200,000 You buy the house just for self-use. What's your condusion now based on explain on Now go back to case 1, think about areas with lower Rent-to-Price Ratis, such an San F, NYC Try 1%, 35% and a even lower Rent-to-Price ratio, discuss your findings Discus/digest/summarize your d-Than findings so far. CLAS QRT (optional) Summarie any additional insights you may have figured from this awarcise (eg, at a different inflation rate, you play with the Exc ONS case 2: Ownershi HO 188 10 CF4 xxXxxxXxXx CF xxxxxXxXx 0 D 0 0 CF14 CF15 xxxxxx xxxxxxX