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You are considering the acquisition of a small office building. The purchase price is Kshs. 775,000. 75% of the purchase price can be borrowed with

You are considering the acquisition of a small office building. The purchase price is Kshs. 775,000. 75% of the purchase price can be borrowed with a 30-year, 7.5% mortgage payable annually. The expected Net operating income from operations assuming a 5-year holding period are as follows;

Year

NOI

1

97,707

2

102,983

3

108,497

4

114,258

5

120,273

The before tax cash flow from the sale of the property is expected to be Kshs.295,050

Required:

i) Calculate before tax IRR on equity. (15 marks)

ii) Should the property be purchased (4 marks)

iii) What are the alternative to property disposition. (6 marks)

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