Investment Analysis Practice Problem

Suppose that you are contemplating an investment in an apartment building. Use the information provided below to answer the questions that follow: Type of Property: Apartment Building Number of Units: 30 Average Rent: $1,500 per unit per month Expected Annual Rent Growth: 5% per year Vacancy and Collection Losses: 5% of Potential Gross Income Other Income: $50 per unit per month Expected Growth in Other Income: 3% per year Operating Expenses: 35% of Effective Gross Income Capital Expenditures: 4% of Effective Gross Income Selling Expenses: 5% of Future Selling Price Going-Out Cap Rate: 6.5% Expected Purchase Price: $5.25 million Loan Terms: Loan Amount: 85% of purchase price Interest Rate: 4.5% per year with monthly payments and monthly compounding Amortization Term: 30 years

a. What is the net present value of the before-tax unlevered cash flows if you assume a five year holding period and a before-tax discount rate of 12%?

b. What is the internal rate of return of the before-tax levered cash flows if you still assume a five-year holding period?