Question
HOMEWORK 3 BEFORE TAX INVESTMENT ANALYSIS DUE ON NOVEMBER 20 AT 11:30PM. Use a 3-year holding period to decide whether or not this is a
HOMEWORK 3 BEFORE TAX INVESTMENT ANALYSIS DUE ON NOVEMBER 20 AT 11:30PM.
Use a 3-year holding period to decide whether or not this is a financially feasible investment. Compute the before-tax NPV and IRR. Comment on your final on your calculations as to whether the investment is worthwhile. Please do all your calculations, including NPV and IRR in Excel. You cannot do your calculations using a financial calculator and input your answers in Excel.
BEFORE TAX INVESTMENT ANALYSIS OF AN APARTMENT BUILDING
Use a 3 year holding period to decide whether or not this is a financially
feasible investment.
INPUTS
NUMBER OF UNITS
RENT
RENT GROWTH
VACANCY RATE
FIXED EXPENSES
VARIABLE EXPENSES
RESERVES FOR REPLACEMENT
FIXED EXPENSE GROWTH
VARIABLE EXPENSE GROWTH
RESERVE ACCOUNT
APPRECIATION [TOTAL FOR HOLDING PERIOD
ACQUISITION PRICE
LOAN TO VALUE RATIO
LOAN AMOUNT
MORTGAGE INTEREST RATE
LOAN PAYMENT -- MONTHLY
LOAN TERM
INVESTOR'S REQUIRED RATE OF RETURN
SELLING COST
HOLDING PERIOD - YEARS
$4,000.00
$900
3.50%
6.00%
$4,500.00
$6,000.00
3.00%
3.00%
3.50%
14.00%
$350,000
$262,500
75%
6.00%
15.00%
5
30
5%
3
Years
Grading Rubric
-
All calculations rightly done, NPV and IRR correctly computed, right decision given: 100 points
-
All calculations rightly done but NPV and IRR or any of them wrongly computed: 80- 85 points
-
Some calculations wrongly done but complete work submitted: 70-75 points
-
Incomplete work submitted: 10-50 points
-
Plagiarized work: 0 points
Example worked in Handout 7:
BEFORE TAX INVESTMENT ANALYSIS OF AN APARTMENT BUILDING
Use a 3 year holding period to decide whether or not this is a financially
feasible investment.
INPUTS
NUMBER OF UNITS
RENT
RENT GROWTH
VACANCY RATE
FIXED EXPENSES
VARIABLE EXPENSES
RESERVES FOR REPLACEMENT
FIXED EXPENSE GROWTH
VARIABLE EXPENSE GROWTH
RESERVE ACCOUNT
APPRECIATION [TOTAL FOR HOLDING PERIOD
ACQUISITION PRICE
LOAN TO VALUE RATIO
LOAN AMOUNT
MORTGAGE INTEREST RATE
LOAN TERM
INVESTOR'S REQUIRED RATE OF RETURN
SELLING COST
HOLDING PERIOD - YEARS
$4,200.00
$5,800.00
$3,600.00
$975
3.50%
8.50%
2.50%
2.50%
3.00%
15.00%
$290,000
$232,000
80%
6.00%
4
LOAN PAYMENT -- MONTHLY
15.50%
30
6%
3
($1,390.96)
Solution:
| BEFORE TAX CASH FLOW | |||||
| YEAR | 1 | 2 | 3 | ||
| PGI | $46,800 | $48,438 | $50,133 | ||
| LESS V | $3,978 | $4,117 | $4,261 | ||
| EGI | $42,822 | $44,321 | $45,872 | ||
| LESS TOE | |||||
| FIXED | $4,200 | $4,305 | $4,413 | ||
| VARIABLE | $5,800 | $5,945 | $6,094 | ||
| RESERVES | $3,600 | $3,708 | $3,819 | ||
| TOES | ($13,600) | ($13,958) | ($14,325) | ||
| NOI | $29,222 | $30,363 | $31,547 | ||
| LESS DS | ($16,691) | ($16,691) | ($16,691) | ||
| BTCF | $12,531 | $13,671 | $14,855 | ||
| BEFORE TAX EQUITY REVERSION | |||||
| FUTURE SALES PRICE | $333,500 | ||||
| LESS SELLING COSTS @ | 6.00% | $20,010 | |||
| NET PROCEEDS FROM SALE | $313,490 | ||||
| LESS LOAN BALANCE | $ 222,915 | ||||
| BTER | $90,575 | ||||
| DECISION CRITERION | |||||
| INITIAL EQUITY | $58,000 | ||||
| YR | Year0 | Year1 | Year2 | Year3 | |
| BTCF | ($58,000) | $12,531 | $13,671 | $14,855 | |
| BTER | $90,575 | ||||
| Total CFs | ($58,000) | $12,531 | $13,671 | $105,430 | |
| IRR | 36% | ||||
| NPV | $31,522.60 | ||||
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Focus On Personal Finance
Authors: Jack Kapoor, Les Dlabay, Robert Hughes, Melissa Hart
6th Edition
125991965X, 978-1259919657
