Finance

1) Mr. Mace is thinking of buying an apartment complex that is offered for sale by the Dobbler Firm. The price, $2.25 million, equals the property's market value. Further, Mr. Mace can obtain a $1,500,000 loan with terms of interest at 8.5 percent per annum, level annualpayments, to amortize the loan over 20 years. There are no points or loan amortizationfees 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 thereconstructed income statement for period 0). In addi- tion, he has the BTER and ATER(before and after-tax equity reversion) for the property assuming it is sold at the end ofthe 5 year holding period. This infor- mation is shown below (this is taken from the solution for question #2 from Problem Set 2): Year o Year 1 Year 2 Year 3 Year 4 Year 5 PGI 316,566 323,689 330,972 346,033 309,600 21,672 338,419 23,689 22,160 22,658 24,222 7,500 7.669 23,168 8,018 315,822 8,198 7,841 308,872 8,383 295,428 302,075 322 928 Vacancy + Misc Income EGI Operating Exp - M. Fee - Property Taxes NOI 330, 194 50.461 45,148 46,164 47.203 48,265 49,351 15,444 15.791 16.146 14,771 76,374 15,104 76,374 16,510 80,048 80,048 80 048 76,374 169,851 159,135 164,433 171.718 183, 175 177,383 158,506 Debt Service 158,506 158,506 158,506 158,506 BTCF 5,927 11,345 13,212 18,877 24,669 NOI 164,433 169 851 183,175 171,718 122,005 177,383 118,902 Interest 127,500 124,864 115,536 12 62,730 Depreciation 65,448 65,448 65,448 62,730 0 0 0 0 0 -P Penalty 0 0 0 0 Discount Exp 0 Passive Income (20,461) (15,735) (25,797) 25,000 0 (6,957) 25,000 4,909 25,000 25,000 Pass Through Other Passive 25,000 0 0 0 0 797 797 S Losses 797 797 0 Taxable income (15.735) 4,112 (25,000) 40 (20,461) 40 (6,967) 40 XMTR 40 40 TAX (10,000) (8,184) (6294) (2,787) 1645 5,927 11,345 13,212 24,669 BTCF - TAX 18,877 (2.787) (8.184) 1,645 (10,000) 15,927 (6,294) 19,506 ATCF 19,529 21,664 23,024 ESP 2.590,877 207.270 NSP 2,383,607 SE NSP 1.928 196 -Adjusted Basis Total Gain on Sale 455,411 2,383,607 1.316.277 1,067,330 100,492 Depreciation Recovery - UMB STER TAX 321,804 Capital Gain on Sale 133.607 ATFR 95683 321,804 Depreciation Recovery (DR) x Dep Recovery Tax Rate (1) Depreciation Recovery Tax (DRT) 25 80,451 133,607 Capital Gains (CG) x Capital Gains Tax Rate() Capital Gains Tax (DRT) 15 20,041 0 Suspended Losses (SL) x Marginal Tax Rate 40 Suspended Losses Recapture (SLR) 0 Mr. Mace has asked you to compute the following investment indicators andfurther to advise him on whether he should purchase this property. I Please 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 9 percent rate, discount the expected after-tax cash flows from thisinvestment and determine: 1) Net present value 2) Profitability index 3) Investment value 4) Internal rate of return c. Should Mr. Mace purchase this building (assuming his after-tax required rate of return is 9 percent)? Explain why or why not. End of document