You are analyzing the potential acquisition of a small residential income$-$producing property. The asking price for the property is $$8,500,000$; gross potential rents are estimated to be $$895,000$ during the first year and are expected to grow at a rate of $2\mathrm{.}5\%$ per year thereafter. Vacancies and collection losses are expected to be $5\%$ of potential gross income. Operating expenses are estimated to be $40\%$ of effective gross income. You will finance the acquisition with a partially amortizing loan for $70\%$ of the purchase price. The annual interest rate will be $3\mathrm{.}00\%,$ and the payments will be based on a $30-$year term for amortization. An amortization table has been provided for your use. Your sales value at the end of year $5$ is based on year $6$ NOI and an assumed exit cap rate that is $0\mathrm{.}50\%(50$ basis points$)$ higher than your purchase cap rate.

Using the Excel template, answer each of the questions below. Round all returns to two decimal places:

A$)$ What is the $$exit$$ cap rate of the investment based on the spread you$$re your purchase cap rate?

B$)$ What is the loan amount that you will receive from the lender based on the proposed LTV $($Loan to Value$)?$

C$)$ What is the annual debt service payment $($sum of $12$ monthly payments$)$ based on the loan parameters above?

D$)$ What is your initial equity invested in year $0($time of acquisition$)?$

E$)$ Project the Effective Gross Income for the property for each of the next $5$ years.

F$)$ Project the Net Operating Income for the property for each of the next $5$ years.

G$)$ Project the cash flow after debt service for each of the next five years.

H$)$ Calculate the gross sales proceeds $($residual$/$terminal value$)$ for the property at the end

of year $5$ based on your exit cap rate assumption.

I$)$ Project the cash flow available to the equity investor for each of the next $5$ years.

J$)$ What will be the equity investor$$s levered $($after debt service$)$ internal rate of return?

K$)$ What will be the equity investor$$s levered cash flow multiple $($after debt service$)$ over

the investment hold period?

L$)$ Calculate the annual current return on equity $($cash on cash$$ return$)$ for each of the $5$ years of the investment hold period.

Assume the investor is looking for projects that can deliver levered equity IRR's in excess of $15\%$ and equity cash flow multiples in excess of $1\mathrm{.}75$X$.$ Also assume that the investor generally seeks projects that can deliver annual "Cash on Cash" returns in the $8-10\%$ range.

$1)$ Would the investor be interested in investing in this project? Why?

$2)$ Changes in which of the investment assumptions may change your opinion in regards to accepting or rejecting this project? In other words, which assumptions should you test the model$$s sensitivity to$?$ Why?