2. Apply capital budgeting to property investment (a) Develop proforma cash flows for property investment project (b) Compute NPV, IRR (c) Develop Problem-Solving and Critical Thinking Skills \begin{tabular}{|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|} \hline \multirow{2}{*}{\multicolumn{9}{|c|}{ 1) buy house in all Cash Or Mortgage; project period = 15) Rent-to-Price Ratio }} & & & & & & & & & \\ \hline & & & & & & & & & & & 10% & & & & & & \\ \hline \multicolumn{3}{|c|}{ 2) property valur $200,000} & & & & \multicolumn{5}{|c|}{ 6) inflation, rental, property value appreciatic } & 3.50% & & & & & & \\ \hline \multirow{2}{*}{\multicolumn{2}{|c|}{\begin{tabular}{l} 3) down paymer \\ 4) 10 -yr mortgag \end{tabular}}} & r $50,000 & & & & \multicolumn{5}{|c|}{ 7) sell the property at the end of 15th year } & & & & & & & \\ \hline & & \& ($19,900) & & & & \multicolumn{3}{|c|}{ 8) annual rental income } & & & $20,000 & & & & & & \\ \hline \multirow{2}{*}{\multicolumn{18}{|c|}{ case 1: Investment }} \\ \hline & & & & & & & & & & & & & & & & & \\ \hline NPV = & IRR= & CFO & CF1 & CF2 & CF3 & CF4 & CF5 & CF6 & CF7 & CF8 & CF9 & CF10 & CF11 & CF12 & CF13 & CF14 & CF15 \\ \hlineXXXXX & XXXXX & 50,000 & 100 & 100 & 100 & 100 & 100 & xXXXX & XXXXX & XXXXX > & XXXXX & XXXXX & 20,000 & 20,000 & XXXXX & XXXXX & XXXXX \\ \hlineXXXXX & XXXXX & 200,000 & 20,000 & 20,000 & 20,000 & 20,000 & 20,000 & 20,000 & 20,000 & 20,000 & 20,000 & 20,000 & 20,000 & 20,000 & 20,000 & 20,000 & 220,000 \\ \hline \end{tabular} Q\#1 Use IRR to comapare Cash vs Mortgage? With all cash buying, all the return of the property (from rental) is earned and not offsetted by mortgage cost, hence Cash better than Mortgage? Q\#2 At required return 7\%, find NPVs to compare Cash vs Mortgage (mutually exclusive), conclusion consistent with IRR? How about required rate 6%, required rate 5.5%, required rate 5%, etc., discuss your finding. (WITH inflation, rental, property value appreciation) \begin{tabular}{|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|} \hlineXXXXX & 50,000 & 100 & 800 & 1,524 & XXXXX & XXXXX & XXXXX & XXXXX & XXXXX & XXXXX & XXXXX & 28,212 & 29,199 & 30,221 & XXXXX & XXXXX \\ \hlineXXXXX & 200,000 & 20,000 & 20,700 & 21,425 & 22,174 & 22,950 & 23,754 & 24,585 & 25,446 & 26,336 & 27,258 & 28,212 & 29,199 & 30,221 & 31,279 & 367,444 \\ \hline & *growing r & 20,000 & 20,700 & 21,425 & 22,174 & 22,950 & 23,754 & 24,585 & 25,446 & 26,336 & 27,258 & 28,212 & 29,199 & 30,221 & 31,279 & 32,374 \\ \hline \end{tabular} case 2: Ownership \begin{tabular}{|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|} \hlineXXXXX & 50,000 & 19,900 & 19,900 & 19,900 & 19,900 & 19,900 & 19,900 & 19,900 & 19,900 & 19,900 & 19,900 & 0 & 0 & 0 & 0 & 200,000 \\ \hlineXXXXX & 200,000 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 200,000 \\ \hline \end{tabular} Q\#4 When you buy the house just for self-use, what's your conclusion (Cash vs Mortgage, which is better) now based on IRR, explain. Q\#5 Now go back to case 1, think of areas with lower Rent-to-Price Ratios (e.g., San Fransisco, NYC). Try at least three Rent-to-Price ratios: 8%,5.5% and an even lower one, and discuss your findings regarding 'Cash vs Mortgage, which is better, by IRR criterion'. Q\#6 Discuss/digest/summarize your If-Then findings so far. Q\#7 (op Discuss any additional insights you may have gathered from this exercise (e.g., see the effects of inflation rates on the scenatios; redo Q\#5 by accounting for inflation)