In this scenario, the acquisition price of a hotel in NYC is $600,000,000. The LTV is 70%. The closing costs to acquire the property are 5% of the loan amount. The investor will sell the property after 5 years. The loan on the property is a 5/1 ARM amortized over 30 years with an interest rate of 5%. The lender requires a DSCR of 1.1 The lender requires a Debt Yield Ratio of 9% or higher. Potential Gross Income is projected to be 15% of the acquisition price and is projected to increase 2% per year every year during the hold period. Vacancy is projected to be 25% of PGI every year with no change over 5 years. Operating Expenses are projected to be 32% of EGI with no change over 5 years. Capital Expenditures are projected to be 12% of EGI with no change over 5 years. The cost to sell the property in year 5 is 6% of the future sales price. The investor acquiring the hotel has a WACC/hurdle rate of 12% and a reinvestment rate of 18%. The company has projected that the going out Cap Rate will be 5.5. The firm is looking for an IRR of 15% or higher.

Questions to answers:

1/In performing a sensitivity analysis how would the NPV and IRR change if vacancy rates were 35% instead of 25%? Assume no other changes from the original question.

a. NPV would be negative and the IRR would drop to 14.4%

b. NPV would be positive and IRR would drop to 13.4%

c. NPV would be negative and IRR would drop to 6.23%

d. NPV would be positive and IRR would be 19.6%

2/In addition to the assumption change in question 1, how would INCREASING the going out Cap Rate change the IRR and NPV?

a. NPV would stay the same and IRR would stay the same

b. NPV and IRR would become worse.

c. NPV would be worse and the IRR would be better

d. NPV would be better and IRR would be worse

3/In performing an additional sensitivity analysis, including the changed assumption in question 1 but not question 2, how would NPV and IRR be changed assuming Potential Gross Income INCREASED 5% (INSTEAD OF 2%) EVERY YEAR THROUGH YEAR 6?

a. IRR would change to 10.6% and NPV would be positive

b. IRR would change to 1.2% and NPV would be negative

c. IRR would increase to 8.2% and NPV would be positive

d. IRR would change to 13.96% and NPV would be negative

4/ Considering ALL of the changes in questions 1 and 3, what would the Debt Service Coverage Ratio be and would it be acceptable to the bank making the loan?

a. It would be .84 and would not be acceptable

b. It would be 1.37 and would be acceptable

c. It would be .99 and would not be acceptable

d. It would be 1.1 and would be acceptable

5/ What is the EGI Multiplier Valuation of the building considering ALL the changes in this sensitivity analysis and using comps of 10.6, 10.1 and 10.4

a. 642,571,224

b. 599,748,254

c. 636,771,481

d. 606,450,000