9. If the Cost Recovery Period is reduced from 27.5 years to 25.0 years what happens to the After-Tax Cash Flows? Remember, the important part for each questions is WHY. 10. If due to tax reform the Capital Gains Tax Rate becomes the same as the standard Income Tax Rate will a greater proportion of the After-Tax return be from the PV of After Tax Cash Flows from Operations or will a greater proportion of the After-Tax return be from the PV of After Tax Sale Proceeds? 11. Typically, a higher proportion of the overall return being from cash flows from the operations of a property (as compared to cash flows from the proceeds of a sale) is considered to be less risky. According to this school of thought, how would a decrease in the Terminal Cap Rate from 9.5% to 9.0% affect the perception of risk associated with this investment? 12. Assume that the interest rate on the loan is increased from 7.5% to 8.0%. How does the change in the total Before Tax Cash Flows (including the sale / reversion of the property at the end of the term) compare to the change in the After Tax Cash Flows (again including the sale / reversion). 13. If the Present Value Discount Rate is reduced from 11.0% to 10.0% would there be a similar reduction in the IRR from this investment? 14. This is a conceptual problem as the model is not set up for changes in vacancy rates over the term. If the vacancy increases over the analysis period which will be affected (decrease) proportionately more. The PV of the After-Tax Cash Flows from Operations or the PV of the After Tax Sales Proceeds? 15. If the Operating Expenses increase from $200 per month to $250 per month what happens to Breakeven Occupancy? 16. According to the all of the inputs in the model a $1,766,667 purchase price results in an After Tax NPV of $52,854 (approximately 3.0% of the purchase price). Would you suggest that the buyer purchase the property at that purchase price? JA SUU E F G H B Number of Units Average Monthly Rent Per Unit Monthly Expenses Vacancy Rate Inflation Overall Capitalization Rate Terminal Cap Rate Present Value Discount Rate 50 $500 $200 7% 2.50% 9.00% 9.50% 11.00% Price Land to Building Ratio Price Allocated to Bldg Price Allocated to Land $ 1,766,667 (First Year NOI Capitalized at above Rate) 20.00% $ 1,413,333 S 353,333 Cost Recovery Period Income Tax Rate Capital Gains Rate 27.5 28.0% 15.0% Loan to Value Term Interest Rate 75% 25 (25 Year Term Amortized Monthly) 7.5% Year Loan Payment EOY Bal Interest $ 1,325,000 $9,791.63 $1,306,239 $98,739 2 $1,306,239 $9,791.63 $1,286,022 597,282 3 $1,286,022 $9,791.63 $1,264,235 $95,713 $1,264,235 $9,791.63 $1,240,757 $94,021 S $1,240,757 $9,791.63 $1,215,456 $92,199 6 $1,215,456 $9,791.63 $1,188,191 $90,235 Before Tax Cash Flows Gross Income Less Vacancy $ $ $ $ Effective Gross Income Less Operating Expenses Net Operating Income Anna Dabana Original Sheet2 Sheet3 1 300,000 $ 7% 21,000 $ 279,000 $ 120,000 $ 159,000 $ 112 00 2 307,500S 7% 21,525 $ 285,975 $ 123,000 $ 162,975$ 1.17 50 3 315,188 S 7% 22,063 S 293,124 S 126,075 S 167,049 $ C1170 4 323,067 $ 7% 22,615 S 300,452 $ 129,227 $ 171,226 $ C117 0 5 331,144 S 7% 23,180 $ 307,964 $ 132,458 $ 175,506 S C117 339,422 7% 23,760 315,663 135,769 179,894 117.500 $ F fx 500 B efore Tax Cash Flow from Operations $ D 41,500 $ E 45,475 S F 49,550 $ G 53,726 S H 58,007 S 62,394 $ 310,653 S S fter Tax Cash Flow et Operating Income epreciation aterest zaxable income axes fter Tax Cash Flow from Operations 159,000 $ 51,394 5 $98.789 8,867 $ 2,483 $ 39,018 $ $ $ $ 162,975 $ 51,394 S $97.282 14,299 $ 4,004 $ 41,472 S 167,049 $ 51,394 $ $95.713 19,943 $ 5,584 S 43,966 $ 171,226 S 51,394 $ $94,021 25,810 $ 7,227 $ 46,499 $ 175,506 S 51,394 S $92,199 31,914 $ 8,936 S 49,071 $ 179,894 51,394 $90,235 38,265 10,714 51,680 S 271,705 ales Price 55 Sales Exp-3% Gross Proceeds asis Capital Gain Capital Gain Tax Wet Gain $ 1,715,526 $1,758,414 S 1,802,375 S 1,847,434 $ 1,893,620 S 51,466 $ 52,752 $ 54,071 S 55,423 S 56,809 $ 1,664,061 $ 1,705,662 S 1,748,304 S 1,792,011 S 1,836,811 $ 1.715,273 $ 1.663,879$ 1,612,485 S 1,561,091 S 1,509,697 $ (51,212) 5 41,783 $ 135,819 $ 230,920 $ 327,114 $ (7,682) S 6,267'S 20,373'S 34,638's 49,067 $ (43,530) $ 35,516 5 115,446 $ 196,282 $ 278,047 After-Tax Net Proceeds from Sale $ 572,288 YE Before-Tax CF Operations and Sale Equity (441,667) $ Yo1 41,500 $ Yo2 45,475 $ Yn 49,550 $ s Yr4 53,726 $ 706,627 IRR Before Tax Cash Flows NPV 17.6% $111,351 $ 39,018 S 41,472 S 43,966 S 46,499 $ 621,359 Alter-Tax Cash Flows IRR ATCF NPV (441,667) $ 14.3% $52,854 Breakeven Occupancy 79% 78% 7796 76% 75% 75% Partition ATIRR: PV After Tax Cash Flows from Operations PV After Tax Sales Proceeds iginal Sheet2 Sheet3 $147,852.68 $293,813.99 . % 33% 62% 9. If the Cost Recovery Period is reduced from 27.5 years to 25.0 years what happens to the After-Tax Cash Flows? Remember, the important part for each questions is WHY. 10. If due to tax reform the Capital Gains Tax Rate becomes the same as the standard Income Tax Rate will a greater proportion of the After-Tax return be from the PV of After Tax Cash Flows from Operations or will a greater proportion of the After-Tax return be from the PV of After Tax Sale Proceeds? 11. Typically, a higher proportion of the overall return being from cash flows from the operations of a property (as compared to cash flows from the proceeds of a sale) is considered to be less risky. According to this school of thought, how would a decrease in the Terminal Cap Rate from 9.5% to 9.0% affect the perception of risk associated with this investment? 12. Assume that the interest rate on the loan is increased from 7.5% to 8.0%. How does the change in the total Before Tax Cash Flows (including the sale / reversion of the property at the end of the term) compare to the change in the After Tax Cash Flows (again including the sale / reversion). 13. If the Present Value Discount Rate is reduced from 11.0% to 10.0% would there be a similar reduction in the IRR from this investment? 14. This is a conceptual problem as the model is not set up for changes in vacancy rates over the term. If the vacancy increases over the analysis period which will be affected (decrease) proportionately more. The PV of the After-Tax Cash Flows from Operations or the PV of the After Tax Sales Proceeds? 15. If the Operating Expenses increase from $200 per month to $250 per month what happens to Breakeven Occupancy? 16. According to the all of the inputs in the model a $1,766,667 purchase price results in an After Tax NPV of $52,854 (approximately 3.0% of the purchase price). Would you suggest that the buyer purchase the property at that purchase price? JA SUU E F G H B Number of Units Average Monthly Rent Per Unit Monthly Expenses Vacancy Rate Inflation Overall Capitalization Rate Terminal Cap Rate Present Value Discount Rate 50 $500 $200 7% 2.50% 9.00% 9.50% 11.00% Price Land to Building Ratio Price Allocated to Bldg Price Allocated to Land $ 1,766,667 (First Year NOI Capitalized at above Rate) 20.00% $ 1,413,333 S 353,333 Cost Recovery Period Income Tax Rate Capital Gains Rate 27.5 28.0% 15.0% Loan to Value Term Interest Rate 75% 25 (25 Year Term Amortized Monthly) 7.5% Year Loan Payment EOY Bal Interest $ 1,325,000 $9,791.63 $1,306,239 $98,739 2 $1,306,239 $9,791.63 $1,286,022 597,282 3 $1,286,022 $9,791.63 $1,264,235 $95,713 $1,264,235 $9,791.63 $1,240,757 $94,021 S $1,240,757 $9,791.63 $1,215,456 $92,199 6 $1,215,456 $9,791.63 $1,188,191 $90,235 Before Tax Cash Flows Gross Income Less Vacancy $ $ $ $ Effective Gross Income Less Operating Expenses Net Operating Income Anna Dabana Original Sheet2 Sheet3 1 300,000 $ 7% 21,000 $ 279,000 $ 120,000 $ 159,000 $ 112 00 2 307,500S 7% 21,525 $ 285,975 $ 123,000 $ 162,975$ 1.17 50 3 315,188 S 7% 22,063 S 293,124 S 126,075 S 167,049 $ C1170 4 323,067 $ 7% 22,615 S 300,452 $ 129,227 $ 171,226 $ C117 0 5 331,144 S 7% 23,180 $ 307,964 $ 132,458 $ 175,506 S C117 339,422 7% 23,760 315,663 135,769 179,894 117.500 $ F fx 500 B efore Tax Cash Flow from Operations $ D 41,500 $ E 45,475 S F 49,550 $ G 53,726 S H 58,007 S 62,394 $ 310,653 S S fter Tax Cash Flow et Operating Income epreciation aterest zaxable income axes fter Tax Cash Flow from Operations 159,000 $ 51,394 5 $98.789 8,867 $ 2,483 $ 39,018 $ $ $ $ 162,975 $ 51,394 S $97.282 14,299 $ 4,004 $ 41,472 S 167,049 $ 51,394 $ $95.713 19,943 $ 5,584 S 43,966 $ 171,226 S 51,394 $ $94,021 25,810 $ 7,227 $ 46,499 $ 175,506 S 51,394 S $92,199 31,914 $ 8,936 S 49,071 $ 179,894 51,394 $90,235 38,265 10,714 51,680 S 271,705 ales Price 55 Sales Exp-3% Gross Proceeds asis Capital Gain Capital Gain Tax Wet Gain $ 1,715,526 $1,758,414 S 1,802,375 S 1,847,434 $ 1,893,620 S 51,466 $ 52,752 $ 54,071 S 55,423 S 56,809 $ 1,664,061 $ 1,705,662 S 1,748,304 S 1,792,011 S 1,836,811 $ 1.715,273 $ 1.663,879$ 1,612,485 S 1,561,091 S 1,509,697 $ (51,212) 5 41,783 $ 135,819 $ 230,920 $ 327,114 $ (7,682) S 6,267'S 20,373'S 34,638's 49,067 $ (43,530) $ 35,516 5 115,446 $ 196,282 $ 278,047 After-Tax Net Proceeds from Sale $ 572,288 YE Before-Tax CF Operations and Sale Equity (441,667) $ Yo1 41,500 $ Yo2 45,475 $ Yn 49,550 $ s Yr4 53,726 $ 706,627 IRR Before Tax Cash Flows NPV 17.6% $111,351 $ 39,018 S 41,472 S 43,966 S 46,499 $ 621,359 Alter-Tax Cash Flows IRR ATCF NPV (441,667) $ 14.3% $52,854 Breakeven Occupancy 79% 78% 7796 76% 75% 75% Partition ATIRR: PV After Tax Cash Flows from Operations PV After Tax Sales Proceeds iginal Sheet2 Sheet3 $147,852.68 $293,813.99 . % 33% 62%