Katie Scarlett is analyzing the same $15-$unit apartment building for a client for possible purchase. She expanded her

analysis from just the DCF $($Income$)$ to include the Direct Cap $($Income$),$ the Cost and the Market approaches to

value. Remember she estimated the gross potential rents are $$250,000$ in Year $1$ and are expected to grow $5\%$ for

through Year $3$ and then by $3\%$ starting in Year $4$ as new supply comes on line. There is currently no vacancy, but is

expected to increase to $3\mathrm{.}0\%$ as the new supply comes into the market. Katie assumes a more typical vacancy and

credit risk of $5\%$ for all periods. She refines her estimate for expenses since they run more inline with $45\%$ of

Effective Gross Income at Year $1$ and will grow independently at the inflation rate $3\%$ per year.

She analyzed the replacement costs in the market and they are approximately $$155,\frac{000}{?}$ unit including cost of land.

She identifies three sales comparables of similar apartment properties in the market that have sold within the last $6$

months. Based on these recent sales, the average cost is $$140,\frac{000}{?}$ unit. The average cap rate is $6\mathrm{.}5\%$

Katie is going analyze the investment on a $5-$year hold. The client wants Katie to refine the bid price to take into

consideration both the cost and market approach to value. They also want to see the NPV$,$ IRR and Equity Multiple

on this potential investment.

Katie reruns the DCF return. The market is assuming the discount rate to be $8\%$ and the reversion cap rate is

estimated to be $7\%.$ What is the new DCF Katie calculates? Hint: the reversion value is based off of Year $6$ NOI.

What is the estimate of value using the Direct Cap $($Income$)?$

To arrive at the refined bid price, Katie weights the Cost Approach $10\%,$ the Market Approach $30\%,$ Direct Cap

$20\%$ and the DCF $40\%.$ What is the bid price Katie presents to the client.

Katie knows that the projected IRR is calculated from the bid price, estimated NOIs and Reversion Value less $4\%$

transaction costs. What is the IRR Katie calculates? What is the NPV$?$

Katie's client also wants to know the equity multiple for the investment. What is the equity multiple Katie

calculates?