Question
You are considering the acquisition of a small office building. The purchase price is $775,000. Seventy-five percent of the purchase price can be borrowed with
You are considering the acquisition of a small office building. The purchase price is $775,000. Seventy-five percent of the purchase price can be borrowed with a 30-year, 7.5 percent mortgage. Payments will be made annually. Up front financing costs will total 3 percent of the loan amount. The expected before-tax cash flows from operations, assuming a five-year holding period, are as follows:
Year BTCF
1 $ 48,492
2 53,768
3 59,282
4 65,043
5 71,058
The before-tax cash flow from the sale of the property is expected to be $295,050. Required: a. What is the net present value of this investment, assuming a 12 percent required rate of return on levered cash flows? b. What is the levered internal rate of return on equity?
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