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	Year 1	Year 2	Year 3	Year 4	Year 5
PGI	309,600	316,566	323,689	330,972	338,419	346,033
- Vacancy	21,672	22,160	22,658	23,168	23,689	24,222
+ Misc Income	7,500	7,669	7,841	8,018	8,198	8,383
EGI	295,428	302,075	308,872	315,822	322,928	330,194
- Operating Exp	45,148	46,164	47,203	48,265	49,351	50,461
- M. Fee	14,771	15,104	15,444	15,791	16,146	16,510
- Property Taxes	76,374	76,374	76,374	80,048	80,048	80,048
NOI	159,135	164,433	169,851	171,718	177,383	183,175
- Debt Service		158,506	158,506	158,506	158,506	158,506
BTCF		5,927	11,345	13,212	18,877	24,669

NOI		164,433	169,851	171,718	177,383	183,175
- Interest		127,500	124,864	122,005	118,902	115,536
- Depreciation		62,730	65,448	65,448	65,448	62,730
- P. Penalty		0	0	0	0	0
- Discount Exp		0	0	0	0	0
Passive Income		(25,797)	(20,461)	(15,735)	(6,967)	4,909
Pass Through		25,000	25,000	25,000	25,000	25,000
Other Passive		0	0	0	0	0

S. Losses		797	797	797	797	0
Taxable Income		(25,000)	(20,461)	(15,735)	(6,967)	4,112
x MTR		.40	.40	.40	.40	.40
TAX		(10,000)	(8,184)	(6,294)	(2,787)	1,645

BTCF		5,927	11,345	13,212	18,877	24,669
- TAX		(10,000)	(8,184)	(6,294)	(2,787)	1,645
ATCF		15,927	19,529	19,506	21,664	23,024

ESP	2,590,877
- SE	207,270
NSP	2,383,607
- UMB	1,316,277
BTER	1,067,330
- TAX	100,492
ATER	966,838

NSP	2,383,607
- Adjusted Basis	1,928,196
Total Gain on Sale	455,411
- Depreciation Recovery	321,804
Capital Gain on Sale	133,607

Depreciation Recovery (DR)	321,804
x Dep Recovery Tax Rate (td)	.25
Depreciation Recovery Tax (DRT)	80,451

Capital Gains (CG)	133,607
x Capital Gains Tax Rate (tg)	.15
Capital Gains Tax (DRT)	20,041

Suspended Losses (SL)	0
x Marginal Tax Rate	.40
Suspended Losses Recapture (SLR)	0

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)

2) Net income multiplier

3) Operating ratio

4) Break even, or default, ratio

5) Debt coverage ratio

6) Overall capitalization rate

7) Equity dividend rate

8) Cash-on-cash return

Using a 9 percent rate, discount the expected after-tax cash flows from this investment and determine:

1) Net present value

2) Profitability index

3) Investment value

4) Internal rate of return

Should Arnold Benedict purchase this building (assuming his after-tax required rate of return is 9 percent)? Explain why or why not.