You are analyzing an investment opportunity with the following information:

• Initial purchase price: $450,000
• Expected holding period: 15 years
• NOI is estimated to be $36,000/year for the first seven years and increase to $42,000/year for the last 8 years.
• Loan amount: $400,000 (interest only)
• Monthly mortgage payment is $28,800/year.
• Expected sale (assume no sale expenses) at the end of 15 years at the ``going-out'' cap rate of 8%
• Outstanding loan balance at the end of 15 years: $285,200

How much is the initial equity investment amount? (1 points)

What are the Before-Tax Cash Flows (BTCF) from operation for year 2 and year 8? (2 points)

Year 2
Year 8

How much is the Before-Tax Equity Reversion (BTER)? (5 points)

Sale Price
Sale Expenses
Net Sale Price
Mortgage Debt
BTER

Fill out the timeline of the cash flows for this investment. Be sure to include all cash inflows and outflows (i.e., equity investment, BTCF and BTER), and be careful about their signs. (10 points)

Year 0
Year 1 - 7
Year 8 - 14
Year 15

If the discount rate is 12%, what is the NPV of the cash flows? What is the IRR? (4 points) Hint: use the CF function in your financial calculator.

NPV
IRR

Should you make this investment? (3 points)

• Yes
• No