80.2K

Verified Solution

Link Copied!

2.Apply capital budgeting to property investment 7 (a) Develop proforma cash flows for property investment project (b) Compute NPV, IRR (c) Develop Problem Solving and Critical Thinking Skills 10 111) buy house in all Cash Or Mortgage; project period -15 years 122) property value 5) Rent-to-Price Ratio $200,000 133) down payment $50,000 144) 10-yr mortgage at 3.5% 6) inflation, rental, property value appreciation 7) sell the property at the end of 15th year 8) annual rental income ($18,036) $20,000 case 1: Investment NPV= IRR CFO CF1 CF2 CF3 CF4 CFS CFG CF7 CFB CF9 (NO inflation, rental, property value appreciation) Xxxxxxx xxxxxx 1,964 xxxxxxX -50,000 -200,000 xxxXxxxxXxx Xxxxxx 1,964 20,000 20,000 XXXXX 1,964 1,964 1,964 xxxxxxxx xxxxxxxX 20,000 20,000 20,000 20,000 20,000 20,000 20,000 23 091 Use IRR to compare Cash vs Mortgage? With all cash buying, all the return of the property (from rental) is earned and not offsetted by mortgage cost, hence Cash better than Mortgage? Q42 At required return 5%, find NPV to compare Cash vs Mortgage (mutually exclusive), conclusion consistent with IRR? How about required rate 4%, required rate 3.5%, required rate 3%, etc., discuss your finding (WITH inflation, rental, property value appreciation) XXXXXX www -10,000 1,964 2,364 -200,000 20,000 20,400 20,400 20,808 "growing rentalo 20,000 2,772 20,808 XxxxxxX xxxxxxx xxxxxx xxxxxxX xxxxxxx XXxxxx 21,224 21,649 22,082 22,523 22,974 23,453 21,649 21,224 22.082 22323 22.974 21.902 23,433 12 34083 Now assume rental grows with inflation, does your conclusion change? Use your numbers to find support for "Rental is a hedge against inflation". (18,036) (18.036) (18,014) (18.036) (18.036) (18.036) (18.036) (18.0M xxXxXxxxX Xxxxxx -50,000 (18.036) (18,096) 0 -200,000 O D 0 D 0 D 0 0 case 2: Ownership 10% 2.00% 4 CF10 CF11 CF12 on CF14 CF15 xxxxxXxXx 20,000 20,000 20,000 20,000 XXxxxxXxXxXxXxXx xxxxxx xxxxxxX 20,000 10,000 20,000 220,000 XXXXXX 24,380 24,367 21,363 Xxxxxx xxxxxxxX 23,902 24,380 24,867 25,365 25,872 295.563 24.380 24,857 25.365 25.872 26.393 D 0 0 200,000 0200,000 D 0 122) property value 3) Rent-to-Price Ratio $200,000 $50,000 ($18,036) 6) inflation, rental, property value appreciation 7) sell the property at the end of 15th year annual rental income CFO CF (12 CFS (F7 CF growing rental 18.000 20,400 30.08 (13 2014 11,645 1108122325 113 Now a rental grows with ination, does your concian change the your numbers to find support for "Rentals a hedge aga 2. Ownersh 3) down payment 4) 10-yr mortgage at 3.5% case 1: Investment NPV 043 CF12 on 24.340 34867 25345 2037 2 50.000 (1) DRIN (ROM GRON) (PH) (0) ROM -200,000 9. 700.000 200,000 NYC You buy the house just for sell use. What's your conduion now based on a New go back to ase 1, think about areas with lower Rent-to-Price Rati, su Try 5%, 3.5% and even lower Rent to Price ratio, do Du/dit/marice your then finding so far. your findings Q87 (aptional) Summaris any additional insights you may have figured from this exercise (eg, at different inftrate, you play with the Ex SWD MO 23 years wwwww 10 ION 2.00% $20,000 (19 10 HOW 010 2012 + 110 (10 6 B CFLS 2.Apply capital budgeting to property investment 7 (a) Develop proforma cash flows for property investment project (b) Compute NPV, IRR (c) Develop Problem Solving and Critical Thinking Skills 10 111) buy house in all Cash Or Mortgage; project period -15 years 122) property value 5) Rent-to-Price Ratio $200,000 133) down payment $50,000 144) 10-yr mortgage at 3.5% 6) inflation, rental, property value appreciation 7) sell the property at the end of 15th year 8) annual rental income ($18,036) $20,000 case 1: Investment NPV= IRR CFO CF1 CF2 CF3 CF4 CFS CFG CF7 CFB CF9 (NO inflation, rental, property value appreciation) Xxxxxxx xxxxxx 1,964 xxxxxxX -50,000 -200,000 xxxXxxxxXxx Xxxxxx 1,964 20,000 20,000 XXXXX 1,964 1,964 1,964 xxxxxxxx xxxxxxxX 20,000 20,000 20,000 20,000 20,000 20,000 20,000 23 091 Use IRR to compare Cash vs Mortgage? With all cash buying, all the return of the property (from rental) is earned and not offsetted by mortgage cost, hence Cash better than Mortgage? Q42 At required return 5%, find NPV to compare Cash vs Mortgage (mutually exclusive), conclusion consistent with IRR? How about required rate 4%, required rate 3.5%, required rate 3%, etc., discuss your finding (WITH inflation, rental, property value appreciation) XXXXXX www -10,000 1,964 2,364 -200,000 20,000 20,400 20,400 20,808 "growing rentalo 20,000 2,772 20,808 XxxxxxX xxxxxxx xxxxxx xxxxxxX xxxxxxx XXxxxx 21,224 21,649 22,082 22,523 22,974 23,453 21,649 21,224 22.082 22323 22.974 21.902 23,433 12 34083 Now assume rental grows with inflation, does your conclusion change? Use your numbers to find support for "Rental is a hedge against inflation". (18,036) (18.036) (18,014) (18.036) (18.036) (18.036) (18.036) (18.0M xxXxXxxxX Xxxxxx -50,000 (18.036) (18,096) 0 -200,000 O D 0 D 0 D 0 0 case 2: Ownership 10% 2.00% 4 CF10 CF11 CF12 on CF14 CF15 xxxxxXxXx 20,000 20,000 20,000 20,000 XXxxxxXxXxXxXxXx xxxxxx xxxxxxX 20,000 10,000 20,000 220,000 XXXXXX 24,380 24,367 21,363 Xxxxxx xxxxxxxX 23,902 24,380 24,867 25,365 25,872 295.563 24.380 24,857 25.365 25.872 26.393 D 0 0 200,000 0200,000 D 0 122) property value 3) Rent-to-Price Ratio $200,000 $50,000 ($18,036) 6) inflation, rental, property value appreciation 7) sell the property at the end of 15th year annual rental income CFO CF (12 CFS (F7 CF growing rental 18.000 20,400 30.08 (13 2014 11,645 1108122325 113 Now a rental grows with ination, does your concian change the your numbers to find support for "Rentals a hedge aga 2. Ownersh 3) down payment 4) 10-yr mortgage at 3.5% case 1: Investment NPV 043 CF12 on 24.340 34867 25345 2037 2 50.000 (1) DRIN (ROM GRON) (PH) (0) ROM -200,000 9. 700.000 200,000 NYC You buy the house just for sell use. What's your conduion now based on a New go back to ase 1, think about areas with lower Rent-to-Price Rati, su Try 5%, 3.5% and even lower Rent to Price ratio, do Du/dit/marice your then finding so far. your findings Q87 (aptional) Summaris any additional insights you may have figured from this exercise (eg, at different inftrate, you play with the Ex SWD MO 23 years wwwww 10 ION 2.00% $20,000 (19 10 HOW 010 2012 + 110 (10 6 B CFLS

Answer & Explanation Solved by verified expert

See Answer