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

1. All calculations rightly done, NPV and IRR correctly computed, right decision given: 100 points

2. All calculations rightly done but NPV and IRR or any of them wrongly computed: 80- 85 points

3. Some calculations wrongly done but complete work submitted: 70-75 points

4. Incomplete work submitted: 10-50 points

5. 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