only need the answer to 3a. for 90% scenario. The solution for problem 2 will be needed is attached.

Using the same information regarding Mr. Arnold Benedict considering buying anapartment complex that is offered for sale by the firm of Getabinder and Flee (seematerial in question #2), consider the following:You have been asked to provide Mr. Benedict some further assistance before hedecides whether to make the purchase of this apartment complex.In doing research Mr. Benedict has found that there maybe a similar building beingplanned for construction close to the location of the building he is consideringpurchasing. If it is built he assumes it will have an impact on his ability to generate therent that was originally estimated. Also, he is concerned regarding ?risk? of a potentialmarket downturn. He has asked you to look into this and advise him how this additionalinformation may impact the analysis.After much research, you have come up with the following data.In the first table you have estimated the associated probabilities of different economicenvironments. You decided to not only consider a potential downturn in the market, butalso if market conditions improved! As will be discussed later, the analysis completedabove (and in problem set #2) could be viewed as resulting from a ?good? economicenvironment. Table 1Economic Environment Associated Probability Excellent .25 Good .60 Poor .15 Total 1.00You have also made some projections on the potential impact on NOI projectionsbased on different economic environments AND if there is a competing complex builtnear the apartment complex that Mr. Arnold Benedict is considering purchasing. Notethat the 100% shown in the table is represents NO change in the NOI projections fromthe previous analysis.Table 2Percent of NOI Shown in Above AnalysisCompetingComplex BuiltExcellent Good PoorYes 100% 95% 90%No 110% 100% 95%5Table 3 expands Table 1 and includes the probability that a competing property is builtnear the existing apartment complex.Table 3Economic EnvironmentProbability ThatCompetingProperty Will ...Excellent Good Poor Be Built .70 .20 .10 Not be Built .30 .80 .90 Total 1.00 1.00 1.00Combining the probability values from Table 1 and Table 3 results in Table 4 whichrepresents the?ProbabilityEstimates of Economic Conditions and Related CompetetiveEnvironments?.Table 4Economic EnvironmentProbability ThatCompetingProperty Will ...Excellent Good Poor Yes .175 .120 .015 .310 No .075 .480 .135 .690 .250 .600 .150 1.000Given this new information, you will need to calculate:a. The expected value of the NPVs (calculate the NPVs with the same 9 percentdiscount rate used in question 2) of these different possible senerios.

UNIVERSITY OF MEMPHIS FOGELMAN COLLEGE OF BUSINESS AND ECONOMICS DEPARTMENT OF FINANCE, INSURANCE AND REAL ESTATE FIR 4350 / 6350 Problem Set #3 Mark Sunderman In working this problem set pay close attention to the instructions on our class web site. Remember, even though you can gain help in the threads, this is still an individual assignment. Anything other than obtaining help in the threads is CHEATING! This assignment does not need to be typed; however, it is very important that you organize your answers clearly and legibly. Since I give partial credit, it is imperative that you show your work in a logical manner. You can deliver this assignment to me by posting it the "Dropbox" for this unit - see top bar for the tab for the Dropbox. Attaching it as a file in an e-mail to me is another possibility.1 After the due date, I will be posting the solutions on the web site, and once graded, I will be posting your grade in the grade book. If you would like me to return the problem set to you after I have graded it, please send me an e-mail with the address you would like it sent. SPECIAL INSTRUCTIONS: These first TWO questions need to be completed by students in both FIR 4350 and FIR 6350. For students in FIR 4350 this problem set is worth 75 points (question1 is worth 25 points and question 2 is worth 50 points). Students in FIR 6350 will have an additional question (which is AFTER question 2). For students in FIR 6350 these first two questions are still worth a total of 75 points. The additional question is worth 75 additional points for a total of 150 points. In other words, all three questions must be answered by students in FIR 6350. For students in FIR 4350 there is NO advantage of working this additional question - SORRY! 1) The following data, objectives, and constraints have been provided with respect to a proposed venture: Cost (including transaction costs) $3,200,000 Net leaseable area (square feet) 29,000 Financing specifications: a. Mortgage loan terms: 12 percent interest; 25 year monthly amortization schedule; renegotiable after 10 years b. Minimum acceptable current yield on equity funds: 6 percent 1 When you e-mail me the assignment, please make it clear what software package the assignment is in. I can usually access most types of files, if I know what it is in! If I have problems opening the file, I will contact you (so please keep a copy of the file!). 1 Operating forecast for first year: Market rent per square foot (based on analysis of comparable properties) Vacancy rate (percent) $23.50 10 Operating expenses, per sq. ft. of leaseable area $9.50 If the minimum acceptable debt coverage ratio is 1.20 and the maximum loan-to-value ratio is 70 percent, what is the maximum total investment (combined equity funds) that will make the above proposal financially feasible? 2) If you recall (from Problem Set 2), 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 property's 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 Year 1 Year 2 Year 3 Year 4 Year 5 315,000 322,875 330,947 339,221 347,701 356,394 - Vacancy 15,750 16,144 16,547 16,961 17,385 17,820 + Misc Income 10,000 10,250 10,506 10,769 11,038 11,314 309,250 316,981 324,906 333,029 341,354 349,888 - Operating Exp 43,328 44,411 45,521 46,659 47,825 49,021 - M. Fee 15,463 15,849 16,245 16,651 17,068 17,494 - Property Taxes 71,400 71,400 71,400 76,048 76,048 76,048 179,059 185,321 191,740 193,671 200,413 207,325 158,506 158,506 158,506 158,506 158,506 26,815 33,234 35,165 41,907 48,819 EGI NOI - Debt Service BTCF 2 NOI 185,321 200,413 207,325 124,864 122,005 118,902 115,536 62,730 - Depreciation 193,671 127,500 - Interest 191,740 65,448 65,448 65,448 62,730 - P. Penalty 0 - Discount Exp 0 0 0 0 0 Passive Income (4,909) 1,428 6,218 16,063 29,059 Pass Through 25,000 25,000 25,000 25,000 25,000 Other Passive 0 0 0 0 0 S. Losses 0 0 0 0 0 (4,909) 1,428 6,218 16,063 29,059 .40 .40 .40 .40 .40 TAX (1,964) 571 2,487 6,425 11,624 BTCF 26,815 33,234 35,165 41,907 48,819 (1,964) 571 2,487 6,425 11,624 28,779 32,663 32,678 35,482 37,195 Taxable Income x MTR - TAX ATCF ESP 2,591,563 - SE 207,325 NSP 2,384,238 Total Gain on Sale 456,042 - UMB 1,316,277 - Depreciation Recovery 321,804 BTER 1,067,961 Capital Gain on Sale 134,238 - TAX 100,587 ATER 967,374 NSP 2,384,238 - Adjusted Basis 1,928,196 Depreciation Recovery (DR) 321,804 x Dep Recovery Tax Rate (td) .25 Depreciation Recovery Tax (DRT) 80,451 3 Capital Gains (CG) 134,238 x Capital Gains Tax Rate (tg) .15 Capital Gains Tax (DRT) 20,136 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 b. 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 c. Should Arnold Benedict purchase this building (assuming his after-tax required rate of return is 9 percent)? Explain why or why not. NOTE: This next question is to be answered by students in FIR 6350 ONLY - this question is worth 75 points. 4 3. Using the same information regarding Mr. Arnold Benedict considering buying an apartment complex that is offered for sale by the firm of Getabinder and Flee (see material in question #2), consider the following: You have been asked to provide Mr. Benedict some further assistance before he decides whether to make the purchase of this apartment complex. In doing research Mr. Benedict has found that there maybe a similar building being planned for construction close to the location of the building he is considering purchasing. If it is built he assumes it will have an impact on his ability to generate the rent that was originally estimated. Also, he is concerned regarding \"risk\" of a potential market downturn. He has asked you to look into this and advise him how this additional information may impact the analysis. After much research, you have come up with the following data. In the first table you have estimated the associated probabilities of different economic environments. You decided to not only consider a potential downturn in the market, but also if market conditions improved! As will be discussed later, the analysis completed above (and in problem set #2) could be viewed as resulting from a \"good\" economic environment. Table 1 Economic Environment Associated Probability Excellent .25 Good .60 Poor .15 Total 1.00 You have also made some projections on the potential impact on NOI projections based on different economic environments AND if there is a competing complex built near the apartment complex that Mr. Arnold Benedict is considering purchasing. Note that the 100% shown in the table is represents NO change in the NOI projections from the previous analysis. Table 2 Percent of NOI Shown in Above Analysis Competing Complex Built Excellent Good Poor Yes 100% 95% 90% No 110% 100% 95% 5 Table 3 expands Table 1 and includes the probability that a competing property is built near the existing apartment complex. Table 3 Economic Environment Probability That Competing Property Will ... Excellent Good Be Built .70 .20 .10 Not be Built .30 .80 .90 1.00 1.00 1.00 Total Poor Combining the probability values from Table 1 and Table 3 results in Table 4 which represents the\"Probability Estimates of Economic Conditions and Related Competetive Environments\". Table 4 Economic Environment Probability That Competing Property Will ... Excellent Good Poor Yes .175 .120 .015 .310 No .075 .480 .135 .690 .250 .600 .150 1.000 Given this new information, you will need to calculate: a. The expected value of the NPVs (calculate the NPVs with the same 9 percent discount rate used in question 2) of these different possible senerios. b. The standard deviation. c. Finally, what does the expected value and standard deviation tell us about this investment project? Does this further analysis change your recommendations in your answer to question 2? Explain why or why not. 6 HINT: Since you are new on the job and want to impress your employer, you checked with your former professor at UM and asked for his suggestions. He indicated that in some respects there is a fairly similar problem in Chapter 17 of the Kolbe, Greer and Waller, Investment Analysis for Real Estate Decisions. He also indicated that you will have to rework parts of the problem from the second problem set (solution shown above) THREE times. You need to adjust the yearly NOIs up by 10% in one senerio, adjust them down by 5% in second senerio, and then down by 10% in the final senerio. Also remember that since the future selling price is impacted by the fifth year NOI, the ESP will also change. At this point you are ready to calculate the NPV (use the same 9 percent discount rate you did in question 2) for each of the four different NOI senerios (110%, 100%, 95%, and 90%). Remember you have already done the NPV for 100% in question 2! 7