Mr. Arnold Benedict is thinking of buying an apartment complex that is offered for sale by the firm of Getabinder and Flee. The price, $2.25 million, equals the propertys market value. Further, Mr. Benedict can obtain a $1,500,000 loan with terms of interest at 8.5 percent per annum, level annual payments, to amortize the loan over 20 years. There are no points or loan amortization fees anticipated.
He has obtained the following estimates from an investment analyst for the BTCF and ATCF (before and after-tax cash flows) for the five year holding period (as well as the reconstructed income statement for period 0). In addition, he has the BTER and ATER (before and after-tax equity reversion) for the property assuming it is sold at the end of the 5 year holding period. This information is shown below (this is taken from the solution for question #2 from Problem Set 2) Year 0 PGI 309,600 Year 1 1 316,566 22,160 Year 2 323,689 22,658 Year 3 330,972 23,168 Year 4 338,419 23,689 Year 5 346,033 24,222 - Vacancy 21,672 + Misc Income 7,500 7,669 7,841 8,0181 8,198 8,383 EGI 295,428 302,075 308,872 315,822 322,928 330,194 - Operating Exp 46,499 47,661 48,853 50,074 L 51,326 52,609 - M. Fee 17,726 18.125 18,532 18,949 19,376 19,812 - Property Taxes 76,374 76,374 80,193 80,193 84.203 84,203 NOI 154,829 159,915 161,294 166,606 168,023 173,570 - Debt Service 158,506 158,506 158,506 158,506 158,506 BTCF 1,409 2,788 8,100 9,517 15,064 NOI - Interest 159,905 127,500 62,730 161,285 124,864 65,448 166,596 122,005 65,448 168,013 118,902 65,448 173,559 115,536 62,730 - Depreciation -P. Penalty - Discount Exp Passive Income LO L0L0L09 (30,325) (29,027) (20,857) (16,337) (4,707) 25,000 25,000 25,000 25,000 25,000 0 0 Pass Through Other Passive S. Losses 5,325 9,352 9,352 9,352 9,352 Taxable income (25,000) 1 (4,707) x MTR AD (25,000) _ .40 (10,000) (20,857) .40 L (8,343) (16,337) .40 (6.534) TAX (10,000) L (1.883) BTCF 1,399 8,090 15,053 - TAX (10,000) 11,399 2,779 (10,000) 12,779 (8,343) 16,433 9,507 (6,534) 16,041 | (1,883) 16,936 ATCF ESP 2,522,453 NSP 2,320,657 - SE 201,796 - Adjusted Basis 1,928, 196 NSP 2.320,657 Total Gain on Sale 396,461 - UMB 1,316,277 - Depreciation Recovery 321,804 BTER 1,004,380 Capital Gain on Sale 70.657 TAX 87,309 917,071 ATER 321,804 Depreciation Recovery (DR) x Dep Recovery Tax Rate (tu) Depreciation Recovery Tax (DRT) 80,451 70,657 Capital Gains (CG) x Capital Gains Tax Rate (te) Capital Gains Tax (DRT) 15 10,599 9,352 Suspended Losses (SL) x Marginal Tax Rate Suspended Losses Recapture (SLR) 3,741 Mr. Arnold Benedict has asked you to compute the following investment indicators and further to advise him on whether he should purchase this property. Please compute the following: a. Using the first-year operating forecast, compute: 1) Gross income multiplier (using effective gross income) Net income multiplier Operating ratio Break even, or default, ratio Debt coverage ratio Overall capitalization rate Equity dividend rate Cash-on-cash return Using a 7 percent rate, discount the expected after-tax cash flows from this investment and determine: Net present value Profitability index 3) Investment value Internal rate of return 1) 2) Should Arnold Benedict purchase this building (assuming his after-tax required rate of return is 7 percent)? Explain why or why not
