An investor is considering the acquisition of a "distressed property" which is on Northlake Bank's REO list. The property is available for

$$200,000$ and the investor estimates that he can borrow $$160,000$ at $4\mathrm{.}5$ percent interest and that the property will require the

following total expenditures during the next year:

Required:

a$.$ The investor is wondering what such a property must sell for after one year in order to earn a $20$ percent return $($IRR$)$ on equity.

b$.$ The lender is now concerned that if the property does not sell, he may have to carry the property for one additional year. He

believes that he could rent it $($starting in year $2)$ and realize a net cash flow before debt service of $$1,200$ per month. However, he

would have to make an additional $$7,200$ in interest payments on his loan during that time, and then sell. What would the price have to

be at the end of year $2$ in order to earn a $20$ percent IRR on equity?

Complete this question by entering your answers in the tabs below.

Required A

The investor is wondering what such a property must sell for after one year in order to earn a $20$ percent return $($IRR$)$ on

equity. $($Do not round intermediate calculations. Round your final answer to nearest whole dollar amount.$)$

Sale value of property $$250,013\frac{+}{0\mathrm{.}01}\%$

Explanation

a$.$

$(1)$ Equity: Price $$200,000-$ Loan $$160,000=$$$40,000.$

$(2)$ Cash out flows are assumed to occur monthly and will average $$2,525.$

$(3)$ Solving we have:

$PV=-$$$40,000$

$PMT=-$$$2,525$

$i=20\frac{\%}{12}$

$n=12$

Solve for $FV=$$$82,013$

Adding the FV of $$82,013$ to the loan balance of $$160,000$ and $$8,000$ in selling expenses results in $$250,013$ as the desired selling price @ EOY in

order to achieve a $20\%$ return.

b$.$

$(1)$ Equity $=$$$40,000$

Rental income $=$$$1,200$ per month

Additional interest $=$$$7,20012$ or $$600$ per month

Net monthly inflow year $2=$$$600$

Beginning of year $1=$$$(40,000)$

Monthly outflows year $1=-$$$2,525$

Monthly outflows year $2=+$$$600$

Solving the cash flow to get an IRR value of $20\%,$ we get the selling price at the end of year $2$ as follows:

$C{F}_0=-$$$40,000$

$C{F}_{1-12}=-$$$2,525$

$C{F}_{13-24}=+$$$600$

$i=20\frac{\%}{12}$

$FV=$$$92,108$

Adding FV of $$92,108$ to the mortgage balance of $$160,000$ and $$8,000$ in selling expenses produces a sale $$260,108$ at end of