Question

The cash flows below contain the cash flows from a completed real estate investment analysis. Based on the information in the cash flows what is the internal rate of return of the before-tax unlevered cash flows?

Purchase Price	$4,569,231
Loan Amount	$3,198,462
	Year 1	2	3	4	5
Leasable Space	30,000	30,000	30,000	30,000	30,000
Average Rent	$20	$21.00	$22.05	$23.15	$24.31
Potential Gross Income	$600,000	$630,000	$661,500	$694,575	$729,304
Vacancy and Collection Losses	10%	10%	10%	10%	10%
	($60,000)	($63,000)	($66,150)	($69,458)	($72,930)
Effective Gross Income	$540,000	$567,000	$595,350	$625,118	$656,373
Operating Expenses	40%	40%	40%	40%	40%
	($216,000)	($226,800)	($238,140)	($250,047)	($262,549)
Capital Expenditures	5%	5%	5%	5%	5%
	($27,000)	($28,350)	($29,768)	($31,256)	($32,819)
Net Operating Income	$297,000	$311,850	$327,443	$343,815	$361,005
Annual Debt Service	($291,581)	($291,581)	($291,581)	($291,581)	($291,581)
Before-Tax Cash Flow	$5,419	$20,269	$35,861	$52,233	$69,424
Future Selling Price	$5,615,639
Selling Expenses	3% ($168,469)
Net Sale Proceeds	$5,447,170
Amount Outstanding	($2,620,301)
Before-Tax Equity Reversion	$2,826,869

Question options:

	a. 9.84%
	b. 10.66%
	c. 10.25%
	d. 11.28%

Answer 1

Based on the given data, it is asked to provide the IRR on UNLEVERED Cash Flows; Unlevered cashflows include only EBITDA, capex cash flows and working capital related cash inflows/outflows;

Based on the same:

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Investment	-45,69,231
Net Sale Proceeds						54,47,170
Net Operating Income		2,97,000	3,11,850	3,27,443	3,43,815	3,61,005
	-45,69,231	2,97,000	3,11,850	3,27,443	3,43,815	58,08,175
IRR	10.25%