Question
John presently owns an office building, which is 30 years old, and is considering renovating it. Assume that if John does the renovation, he will
John presently owns an office building, which is 30 years old, and is considering renovating it. Assume that if John does the renovation, he will be able to obtain a new loan that is equal to the balance of the existing loan plus 75% of the renovation costs. Assume a five-year holding period. Below is the information about the property and Johns estimation if he does the renovation.
| CURRENT | IF RENOVATED |
| ||||||
| Purchase Price |
| 1,000,000 |
| Renovation Cost | 400,000 |
|
| |
| Building Value |
| 800,000 |
| Initial Increase in NOI (year 4) | 20.00% |
|
| |
| Land Value |
| 200,000 |
| Annual Increase in NOI | 3.00% |
|
| |
| Loan-to-value ratio | 75.00% |
| Resale Value after holding 5 years | 1,523,000 |
|
| ||
| Interest |
| 9.00% |
| Selling Expenses | 3.00% | of sale price |
| |
| Term |
| 30 | years | New Loan: |
|
|
|
|
| Payments per year | 12 |
| Interest Rate | 11.00% |
|
| ||
| Years since Purchased | 3 |
| Term |
| 30 years |
| ||
| Current NOI (year 4) |
| 90,000 |
| Payments per year |
| 12 |
| |
| Projected Increase in NOI | 2.00% | per year |
|
|
| |||
| Resale Value Today | 1,050,000 |
|
| |||||
| Depreciable Life |
| 39 | years |
| ||||
| Ordinary income tax rate |
| 28.00% |
|
| ||||
| Price appreciation tax rate |
| 28.00% |
|
| ||||
| Depreciation recapture tax rate |
| 28.00% |
| |||||
The NOI for year 4 is $90,000. What is the after-tax cash flow from operations for year 4 if John does not renovate the property? (Choose the nearest value)
a. $17,275
b. $22,131
c. $16,526
d. $22,880
What is the annual loan payment if John does renovate the property? (Choose the nearest value)
a. $152,366
b. $118,066
c. $88,152
d. $98,456
What is the capital gain tax from the property sale by the end of year 8 if John does renovate the property? (Choose the nearest value)
a. $81,955
b. $60,308
c. $43,077
d. $45,949
What is the mortgage balance by the end of year 8 if John does renovate the property? (Choose the nearest value)
a. $1,152,233
b. $1,003,848
c. $965,662
d. $954,230
If John can renovate the property with obtaining a new loan that is equal to 75% of the sum of the existing value of the property ($1,050,000) plus the renovation costs. What is the additional equity John needs to invest if he does the renovation?
a. $37,824
b. $55,245
c. $85,423
d. $45,641
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Essentials Of Managerial Finance
Authors: Scott Besley, Eugene F. Brigham
12th Edition
0030258723, 9780030258725
