Problem 2 Weight (40 points) Commercial Real Property Company, Inc. is currently considering the purchase of a multi- purpose facility that will facilitate long-term rental contracts as specified below: Base rent data: Rental space Occupant type and activity Line of business NOK Rental income/year in m2 The Happy Store Wisdom Hall Library XLL Sporty Fun 1,500 2,200 3,800 Retail Public Storage 700 600 200 The following information is provided regarding operation and financing of the facility currently under consideration: Rents received by the end of each year are indexed to the consumer price index (CPI) which is expected to increase by an average of 2% per year during years 1-4. Operational costs are expected to amount to 9% of annual gross rental income. . Value of the property is expected to increase by an average of 2.25% per year during years 1-4, and will be sold at the end of the fourth year. Property's all- in cost is currently NOK 65 million. An annual depreciation of 2% is allowed based on the declining-balance method. 78% of the investment is debt-financed at 5% interest per year on an ordinary annuity loan to be amortized over 25 years with monthly payments of interest and principal. At time of sale, the loan balance is repaid in full. Remainder of the purchase price (22%) is financed with equity. The project's marginal tax rate will average 25% per year during the four-year holding-period. Answer the following questions: (a) 20p Calculate owners' annual cash flow after tax during each of the four years. (b) 10p What is equity's after-tax return on investment over the four-year holding- period. (c) 10p What is owners' going-in yield, as well exit yield, in this project? Problem 2 Weight (40 points) Commercial Real Property Company, Inc. is currently considering the purchase of a multi- purpose facility that will facilitate long-term rental contracts as specified below: Base rent data: Rental space Occupant type and activity Line of business NOK Rental income/year in m2 The Happy Store Wisdom Hall Library XLL Sporty Fun 1,500 2,200 3,800 Retail Public Storage 700 600 200 The following information is provided regarding operation and financing of the facility currently under consideration: Rents received by the end of each year are indexed to the consumer price index (CPI) which is expected to increase by an average of 2% per year during years 1-4. Operational costs are expected to amount to 9% of annual gross rental income. . Value of the property is expected to increase by an average of 2.25% per year during years 1-4, and will be sold at the end of the fourth year. Property's all- in cost is currently NOK 65 million. An annual depreciation of 2% is allowed based on the declining-balance method. 78% of the investment is debt-financed at 5% interest per year on an ordinary annuity loan to be amortized over 25 years with monthly payments of interest and principal. At time of sale, the loan balance is repaid in full. Remainder of the purchase price (22%) is financed with equity. The project's marginal tax rate will average 25% per year during the four-year holding-period. Answer the following questions: (a) 20p Calculate owners' annual cash flow after tax during each of the four years. (b) 10p What is equity's after-tax return on investment over the four-year holding- period. (c) 10p What is owners' going-in yield, as well exit yield, in this project