A summary of the NOI projections is provided below.

To organize your financial analysis, you add new information to your existing modelling assumptions $($see Assignment $2)$:

$6$ Year NOI Projection

$123456$ Calendar Year Ending $6/30/196/30/206/30/216/30/226/30/236/30/24$

Net Operating Income $2,411,1292,485,6312,565,1522,335,7642,725,2002,850,866$

Assumptions

Equity Discount Rate $14\mathrm{.}0\%$ Purchase Price $29,000,000$ In$-$Place Cap Rate $8\mathrm{.}3\%$ Terminal Cap Rate $9\mathrm{.}0\%$

Mortgage Amount Mortgage Term Amortization Period Interest Rate Payment Frequency Selling Expenses

$75\%$ LTV $5$ years $25$ years

$6\mathrm{.}0\%$ per year

$12$ payments per year

$3\mathrm{.}0\%$ of sale price

On the basis of this information, you set the following six $(6)$ tasks for yourself:

$1.$ Develop $6-$year projections of equity before tax cash flows

$2.$ Estimate the before tax equity reversion from the sale of the property at the end of year $5$

$3.$ Compute NPV and IRR of the investment

$4.$ You work with different lenders to arrange a mortgage for the acquisition of the property. The

table overleaf provides information about the possible LTV ratios and interest rates those lenders could offer you. The probabilities with which you would be able to negotiate each of the interest rates under the different LTV assumptions are also given in the table. To analyze the sensitivity of the project IRR to your financing choices, you compute the mean IRR and its standard deviation across the different interest rate levels under each of the five LTV assumptions. Based on your financial analysis, which LTV assumption offers the best trade$-$off between risk and return?

Continued overleaf.

LTV $60\%65\%75\%85\%90\%$ Interest Rate Probability

$5\mathrm{.}0\%10\%5\mathrm{.}5\%15\%6\mathrm{.}0\%50\%7\mathrm{.}0\%15\%8\mathrm{.}0\%10\%$

Mean IRR STDEV IRR Mean $/$ STDEV

$5.$ Analyze the sensitivity of the project to different assumptions for the terminal cap rate, using a graph to illustrate your results. How sensitive is the project IRR to variation in that cap rate?

$6.$ Analyze the breakdown of the investment IRR: How much of the IRR is driven by cash flows from operations? How much of it is driven by the disposition?