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Suppose that you are contemplating an investment in an apartment building. Use the information provided below...

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Finance

Suppose that you are contemplating an investment in an apartmentbuilding. Use the information provided below to answer thequestions that follow:

Type of Property: Apartment Building

Number of Units: 30

Average Rent: $1,500 per unit per month

Expected Growth in Rents: 5% per year

Vacancy and Collection Losses: 5% of Potential Gross Income

Other Income: $50 per unit per month

Expected Growth in Other Income: 3% per year

Operating Expenses: 35% of Effective Gross Income

Capital Expenditures: 4% of Effective Gross Income

Selling Expenses: 5% of Future Selling Price

Going-Out Cap Rate: 6.5%

Expected Purchase Price: $5.25 million

Loan Terms:

Loan Amount: 85% of purchase price

Interest Rate: 4.5% per year with monthly payments and monthlycompounding

Amortization Term: 30 years

a. What is the net present value of the before-tax unleveredcash flows if you assume a five-year holding period and a discountrate of 12%?

b. What is the internal rate of return of the before-tax leveredcash flows if you still assume a five-year holding period?

Answer & Explanation Solved by verified expert
4.2 Ratings (791 Votes)
A in the first part we need to calculate net operating income NOI for 5 years from income approach year 1 2 3 4 5 Gross rental income exp growth 5 per year 540000 567000    See Answer
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