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

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Finance

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

4.0 Ratings (482 Votes)

Step 1 Calculate the Effective Gross Income as given below As these are straight forware calculation I am not giving the detailed formulas Items Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Average Rent per month 150000 157500 165375 173644 182326 Growth Rate of Rent 5 Units 30 Rentals per Annum 54000000 56700000 59535000 62511750 65637338 Other Income per month 5000 5150 5305 5464 5628 Growth in Other Income 30 Units 30 Other Income per annum 1800000 1854000 1909620 1966909 2025916 Total Gross Income before losses 55800000 See Answer

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Suppose that you are contemplating an investment in an apartmentbuilding.Use the information provided below to answer the questions thatfollow:Type of Property: Apartment Building Number of Units: 30Average Rent: $1,500 per unit per monthExpected Growth in Rents: 5% per yearVacancy and Collection Losses: 5% of Potential Gross IncomeOther Income: $50 per unit per monthExpected Growth in Other Income: 3% per yearOperating Expenses: 35% of Effective Gross IncomeCapital Expenditures: 4% of Effective Gross IncomeSelling Expenses: 5% of Future Selling PriceGoing-Out Cap Rate: 6.5%Expected Purchase Price: $5.25 millionLoan Terms: Loan Amount: 85% of purchase priceInterest Rate: 4.5% per year with monthly payments and monthlycompoundingAmortization Term: 30 yearsa. 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?