Below is the question, thank you so much who can ever help me with this!
If you recall (from Problem Set 2), Mr. Arnold Benedict is thinking of buying an apartment complex that is offered for sale by the firm of Getabinder and Flee. The price, $2.25 million, equals the property's market value. Further, Mr. Benedict can obtain a $1,500,000 loan with terms of interest at 8.5 percent per annum, level annual payments, to amortize the loan over 20 years. There are no points or loan amortization fees anticipated. He has obtained the following estimates from an investment analyst for the BTCF and ATCF (before and after-tax cash flows) for the five year holding period (as well as the reconstructed income statement for period 0). In addition, he has the BTER and ATER (before and after-tax equity reversion) for the property assuming it is sold at the end of the 5 year holding period. This information is shown below (this is taken from the solution for question #2 from Problem Set 2): Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 PGI 309,600 316,566 323,689 330,972 338,419 346,033 Vacancy 21,672 22, 160 22,658 23, 168 23,689 24,222 ..... + Misc Income 7,500 7.669 7,841 8,018 8,198 8,383 EGI 295,428 302,075 308,872 ......... 315,822 322,928 330, 194 - Operating Exp 46,499 47,661 48,853 50,074 51,326 52,609 ..... ..... - M. Fee 17,726 18,125 18,532 18.949 19,376 19,812 - Property Taxes 76,374 76,374 80, 193 80, 193 84,203 84,203 NOI 154,829 ....... 159,915 161,294 166,606 168,023 173,570 - Debt Service 158,506 158,506 158,506 158,506 158,506 ..... .... BTCF 1,409 2,788 8, 100 9,517 15,064NOI 159,905 161,285 166,596 168,013 173,559 Interest 127,500 124,864 122,005 118,902 115,536 - Depreciation 62,730 65,448 .... 65,448 65,448 62,730 .. .. .... .... ... - P. Penalty 0 0 0 0 ..... 0 - Discount Exp 0 O O Passive Income (30,325) (29,027) (20,857) (16,337) (4,707) Pass Through 25,000 25,000 25,000 25,000 ..i... 25,000 Other Passive 0 0 0 0 0 S. Losses 5,325 9,352 9,352 9,352 9,352 Taxable Income (25,000) (25,000) (20,857) (16,337) (4,707) X MTR .40 .40 40 40 .... 40 ..... ..i.. TAX (10,000 (10,000) (8,343) (6,534) (1,883)BTCF 1,399 2,779 ....... 8,090 ....... 9,507 ....... 15,053 TAX (10,000) (10,000) (8,343) (6,534) (1,883) ...... ........ ....... ...... ATCF 11,399 12,779 16,433 ...... 16,041 ...... 16,936 ESP 2,522,453 NSP 2,320,657 SE 201,796 NSP 2,320,657 - Adjusted Basis 1,928, 196 396,461 1,316,277 Total Gain on Sale - UMB - Depreciation Recovery 321,804 BTER 1,004,380 70,657 - TAX 87,309 Capital Gain on Sale ATER 917,071 Depreciation Recovery (DR) 321,804 x Dep Recovery Tax Rate (to) .25 ...... Depreciation Recovery Tax (DRT) 80,451 Capital Gains (CG) 70,657 x Capital Gains Tax Rate (to) 15 Capital Gains Tax (DRT) 10,599 Suspended Losses (SL) 9,352 x Marginal Tax Rate 40 Suspended Losses Recapture (SLR) ..... 3,741Please compute the following: a. Using the first-year operating forecast, compute: 1) Gross income multiplier (using effective gross income) 2) Net income multiplier 3) Operating ratio 4) Break even, or default, ratio 5) Debt coverage ratio 6) Overall capitalization rate 7) Equity dividend rate 8) Cash-on-cash return b. Using a 7 percent rate, discount the expected after-tax cash flows from this investment and determine: 1) Net present value 2) Profitability index 3) Investment value 4) Internal rate of return 0. Should Arnold Benedict purchase this building (assuming his after-tax required rate of return is 7 percent)? Explain why or why not
