Assume you are buying an existing apartment complex and have made the following assumptions: Data Acquisition...

Assume you are buying an existing apartment complex and have made the following assumptions:

Data
Acquisition Cost	$5,000,000
Project Length	5
Year 1 Rental Income	$560,000
Rental Income Annual Growth	3%
Year 1 Expenses	$200,000
Expenses Annual Growth	2%
Ordinary Tax Rate	28%
Capital Gains Tax Rate	15%
Annual Appreciation Rate of Property Market Value	3%

30-year Fixed Fully Amortizing Loan (monthly payments)
Term in Years	30
Interest Rate (Annualized)	6%
LTV	75%

The proceeds of the loan are received at time 0 and the first operating revenue is received one year later, at the end of year 1. For simplicity, assume there is no depreciation. You plan to sell the property at the end of year 5.

a) Construct an amortization table for the loan.

b) Calculate the before tax and after-tax IRR of your investment.

Solutions

Expert Solution

Year	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21	22	23	24	25	26	27	28	29	30
(A) Principle/Amount Outstanding	50,00,000	49,36,756	4869717	4798656	4723332	4643488	4558853	4469140	4374045	4273243	4166394	4053133	3933077	3805818	3670923	3527935	3376367	3215705	3045403	2864883	2673532	2470700	2255698	2027796	1786220	1530149	1258714	970992.6	666008.1	342724.6
(B) Add : Interest	300000	296205.4	292183	287919.4	283399.9	278609.3	273531.2	268148.4	262442.7	256394.6	249983.6	243188	235984.6	228349.1	220255.4	211676.1	202582	192942.3	182724.2	171893	160411.9	148242	135341.9	121667.8	107173.2	91808.93	75522.82	58259.55	39960.49	20563.48
(C ) Total amount Due (A+B)	53,00,000	5232961	5161900	5086576	5006732	4922097	4832384	4737289	4636487	4529638	4416377	4296321	4169062	4034167	3891179	3739611	3578949	3408647	3228127	3036776	2833944	2618942	2391040	2149464	1893393	1621958	1334237	1029252	705968.6	363288.1
(D ) Total Equal Amount Paid	3,63,244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244	363244
(E) Payment Made Towards Principal (D-B)	63,244	67038.64	71060.96	75324.62	79844.09	84634.74	89712.82	95095.59	100801.3	106849.4	113260.4	120056	127259.4	134894.9	142988.6	151567.9	160662	170301.7	180519.8	191351	202832.1	215002	227902.1	241576.2	256070.8	271435.1	287721.2	304984.4	323283.5	342680.5
(F) Balance Outstanding (A-E)	49,36,756	4869717	4798656	4723332	4643488	4558853	4469140	4374045	4273243	4166394	4053133	3933077	3805818	3670923	3527935	3376367	3215705	3045403	2864883	2673532	2470700	2255698	2027796	1786220	1530149	1258714	970992.6	666008.1	342724.6	44.071

The balance of 44 is to be avoided as it has come up from roundin off error. the above solution has been done on an excelsheet.

Theamount of equal Annnual Installments have come from afinancial calculator. Put in+/- 5,000,000 PV,then insert 30 as N,put in 6 as I/Y and then calculate the PMT.

1(b)

Year	0.00	1.00	2.00	3.00	4.00	5.00
Acquisition Cost	-5000000
Revenue (A)		560000	576800	594104	611927	630285
Expenses (B)		200000	204000	208080	212242	216486
Profit (C )		360000	372800	386024	399686	413799
Ordinary Tax (D)		100800	104384	108087	111912	115864
Balance after tax (C-D)		259200	268416	277937	287774	297935
Appreciated value at the end (E )						5796370
Capital gains tax (F)						119456
Value after tax (E-F)						5676915
IRR pre tax		10.27%
IRR post tax		7.85%

To calculate the Pre tax & Post Tax IRR, in the financial calculator use the CF mode. put in +/- 5000000 as CF0 and put the yearly data as given above in the next CF as CF1,CF2,CF3,CF4,CF5 with frequencyfor all as 1 and then press CPT and then IRR. The appreciated value at the end of year 5 will also come in year 5 along with the revenue.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

You are considering the purchase of an apartment complex. The following assumptions are made: • The...

You are considering the purchase of an apartment complex. The following assumptions are made: • The purchase price is $1,150,000. • Potential gross income (PGI) for the first year of operations is projected to be $195,000. • PGI is expected to increase at 4 percent per year. • 3% vacancies are expected. • Operating expenses are estimated at 30 percent of effective gross income. Capital expenditures are estimated at 10 percent of effective gross income. • The market value of...

You are considering the purchase of an apartment complex. The following assumptions are made: • The...

You are considering the purchase of an apartment complex. The following assumptions are made: • The purchase price is $1,250,000. • Potential gross income (PGI) for the first year of operations is projected to be $191,000. • PGI is expected to increase at 4.5 percent per year. • 5% vacancies are expected. • Operating expenses are estimated at 35 percent of effective gross income. Capital expenditures are estimated at 15 percent of effective gross income. • The market value of...

You consider buying a lot on which you will build a small apartment complex. The asking...

You consider buying a lot on which you will build a small apartment complex. The asking price for the lot is $500,000 and the estimated cost to build the apartment complex is $1,000,000 (construction should take one year). One year from the date you intend to purchase the lot the city is going to make an important decision regarding the use of the land just across from your lot. You believe that there is a 30% chance that the decision...

Allen Benedict is thinking of buying an apartment complex that is offered for sale by the...

Allen Benedict is thinking of buying an apartment complex that is offered for sale by the firm of Getz and Fowler. The price, $2.25 million, equals the property's market value. The following statement of income and expense is presented for Benedict's consideration: The St. George Apartments Prior Year's Operating Results, Presented by Gertz and Fowler, Brokers 30units, all 2-bedroom apartments, $975/month $351,000 water & dryer rentals 10,000 gross annual income $361,000 Less operating expenses: Manager's salary $10,000 Maintenance staff (1...

You are considering buying an apartment complex with 50 units. The units rent for $1000 per...

You are considering buying an apartment complex with 50 units. The units rent for $1000 per month each. Usually, there is a 10% vacancy. You want a 7.5% percent total annual after-tax return on the funds you invest. You do not expect any appreciation of the property value. You also expect the property to not have any economic or real depreciation in value, since the maintenance expenses will keep the property in equal condition year after year. When fully occupied,...

Evaluate the purchase of an existing 500 unit apartment complex for $20000000, the building is assumed...

Evaluate the purchase of an existing 500 unit apartment complex for $20000000, the building is assumed to have a 20 year functional life. Treat the rents as being collected at the end of each year, along with associated variable and fixed costs. Assume rent controls will prohibit the rent from being raised over the life of the building. Assume that the underlying property reverts to the original owners at the end of twenty years, and that you will also be...

Evaluate the purchase of an existing 1050 unit apartment complex for $15000000, the building is assumed...

Evaluate the purchase of an existing 1050 unit apartment complex for $15000000, the building is assumed to have a 20 year functional life. Treat the rents as being collected at the end of each year, along with associated variable and fixed costs. Assume rent controls will prohibit the rent from being raised over the life of the building. Assume that the underlying property reverts to the original owners at the end of twenty years, and that you will also be...

As manager of Precision Properties, you are considering the purchase of an apartment complex. The following...

As manager of Precision Properties, you are considering the purchase of an apartment complex. The following assumptions are made: • The purchase price is $2,000,000. • Potential gross income (PGI) for the first year of operations is projected to be $320,000. • PGI is expected to increase at 4 percent per year. • No vacancies are expected. • Operating expenses are estimated at 38 percent of effective gross income. Ignore capital expenditures. • The market value of the investment is...

A relatively new apartment building in St. Kilda has been made with complex architectural balconies. The...

A relatively new apartment building in St. Kilda has been made with complex architectural balconies. The balcony railings have been fabricated from an extruded 6000-series (Al-Mg-Si) aluminium alloy. The balcony railings have been fixed to mild steel posts using stainless steel screws. The construction team did not use rubber washers in any instance. Briefly describe what you think may occur in such a situation under atmospheric conditions. Also, what do you think may occur if galvanised steel screws were used...

As treasurer of Firm A., you are investigating the possible acquisition of Firm B. You have the following data:

As treasurer of Firm A., you are investigating the possible acquisition of Firm B. You have the following data: You estimate that investors currently expect a steady growth of about 6% in Firm B’ earnings and dividends. Under new management this growth rate would be increased to 8% per year, without any additional capital investment required. Assume that the cost of equity remains unchanged and the Firm A's equity value also remains unchanged. Firm A Firm B Earnings...

Subjects