Question
Using the following assumptions, calculate the without leverage IRR; then, calculate the with leverage IRR. Property Purchase Price $100,000 NOI $8,000 for 5 years No
Using the following assumptions, calculate the "without" leverage IRR; then, calculate the "with leverage" IRR.
Property Purchase Price $100,000
NOI $8,000 for 5 years
No increase in value - Sales price $100,000
Loan: 80% of Purchase Price
Interest Rate: 7.5%
| 1. | IRR without leverage = 8% Cost of debt = 8% IRR with leverage = 20% Leverage is outstanding because the IRR on the property is bigger than anyone hoped for. | |
| 2. | IRR without leverage = 10% Cost of debt = 19% IRR with leverage = 10% Leverage is equal because the IRR on the property is the cost of debt (19%). | |
| 3. | IRR without leverage = 9% Cost of debt = 6.5% IRR with leverage = 10% Leverage is neutral because the IRR on the property is equal to the cost of debt. (6.5%) | |
| 4. | IRR without leverage = 8% Cost of debt = 7.5% IRR with leverage = 10% Leverage is positive because the IRR on the property is greater than the cost of debt (7.5%). |
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