Problem $11-2$

You are an employee of University Consultants, Limited, and have been given the following assignment. You are to present an

investment analysis of a small retail income$-$producing property for sale to a potential investor. The asking price for the property is

$$1,250,000$; rents are estimated at $$160,000$ during the first year and are expected to grow at $2\mathrm{.}5$ percent per year thereafter.

Vacancies and collection losses are expected to be $10$ percent of rents. Operating expenses will be $35$ percent of effective gross

income. A fully amortizing $70$ percent loan can be obtained at $8$ percent interest for $30$ years $($total annual payments will be monthly

payments $12).$ The property is expected to appreciate in value at $3$ percent per year and is expected to be owned for five years and

then sold.

Required:

a$.$ What is the first$-$year debt coverage ratio?

b$.$ What is the terminal capitalization rate?

c$.$ What is the investor's expected before$-$tax internal rate of return on equity invested $($BTIRR$)?$

d$.$ What is the NPV using a $14$ percent discount rate?

e$.$ What is the profitability index using a $14$ percent discount rate?