SECTION II (40 POINTS)

Answer ALL questions in this section

#1A (30 points)

The following information refers to a two-unit apartment building that is available for purchase.

1. Calculate the three-year cash flow projection by filling in the blanks below. Also calculate and fill-in the following ratios as indicated In table A (25 points)

1. Equity Dividend Rate

2. Debt Yield Ratio

3. Debt Coverage Ratio

2. Should the investor undertake the project? Evaluate/discuss the rational grounds for your judgment by computing (15 points)

1. NPV
2. IRR

Very briefly discuss your solutions below.

PROJECT DATA

Rent: $800 per unit/month; rises at 4% per year; Vacancy =10%/yr

Purchase Price: $84,000 ; Land Value = 25% of Property value Financing: LTV= 80%, Interest =6%, 15 years, monthly payments Holding period: 3 years (January 2009 through Dec. 2011) Selling price (End of yr.3)= $125000; selling expense : 3% Investors req. return= 16%; Operating Expenses = 50% of PGI Show your computation for:

PGI (year 1)..

PGI (year 2) ..

PGI (year 3) ..

Annual Debt Service:

#1a (32 points)

TABLE A Cash Flow Projection

Year: One Two Three

Potential Gross Income (PGI)
-Vacancy/Collect Losses (VCL)
Effective Gross Income (EGI)
-Operating Exp./CapEx.
Net Operating Income (NOI)
-Annual Debt Service
Before Tax Cash Flow (BTCF)
Before Tax Equity Reversion**	n.a	n.a.
Total CashFlow year t(t=1,2,3)
X PVF16%,t
Pres. Value (CFt)
Equity Dividend Rate
Debt Coverage Ratio
Debt Yield Ratio

n.a. = Not Applicable

** From table B below

Table B: Reversion (Terminal Cash Flow Before Tax)

Sales Price
- Selling Exp.(@ 3% of Sales Price)
Net Sales Price
- Mortgage Balance (EOY 3)
Before Tax Equity Reversion (BTER)

Table C: Data for Computation of Evaluation Criteria in 6b

Year: One Two Three

BTCFt
BTER3	-	-
Total Cash Flows
X PVF16%,t
PV[Total Cash Flow]
PV[BTCFt ,BTER3]
Equity Investmt
NPVE
IRRE

1B (10 points)

Should the investor buy this property? What would be his Net Present Value to Equity and Internal Rate of Return to Equity Position? Discuss your computations below.

Useful Computational Formula

T

NPV_E = [BTCF_t /(1+r)^t] + BTER_T / (1+r)^T - E₀ ..(1)

t=1

Where t = 1,2,3

MB_T = Terminal Mortgage Balance (MB₃)

BTER = Before Tax Equity Reversion (Terminal Cash Flow)

ADS = Annual Debt Service = MDS x 12

MDS = Monthly Debt Service

E_{0 =} Equity Investment

NPV_E = Net Present Value to Equity Position

IRR_E = Internal Rate of Return to Equity Position