Question

1. Assume that you are an investment analyst preparing an analysis of an investment opportunity for a client. Your client is considering the acquisition of an apartment complex from a developer at the point in time when the apartments are ready for first occupancy. Your have developed the following information.

1) Number of units = 30

2) First year market rent per unit = $475 per month

3) Rent is projected to increase by 6% each year

4) Annual vacancy rate = 3% of PGI

5) Annual collection loss = 2% of PGI

6) Annual operating expense = 32% of EGI

7) Miscellaneous yearly income (parking and washers/dryers) = $750

8) Monthly miscellaneous income is expected to remain constant

9) Purchase price = $1,800,000

10) Estimated value of land = $300,000

11) Anticipated mortgage terms:

a) Loan to value ratio = .80

b) Interest rate = 5.5%

c) Years to maturity = 25

d) Points charged = 3

e) Prepayment penalty = 2% of outstanding balance

f) Level payment, fully amortized

g) Fixed interest rate, annual payments

12) Anticipated holding period = 4 years

13) Proportion by which property is expected to appreciate during the holding period -- 4% a year

14) Estimated selling expenses as proportion of future sales price = 5%

15) Marginal income tax rate for the client = 15%

16) It is assumed that the property is put into service on January 1 st and sold on December 31st

17) Assume the client is "active" in the property management

18) It is assumed that the client has an adjusted gross income of $95,000 and has no other passive income not offset by other passive losses (for each year of the anticipated holding period)

19) Client's minimum required after tax rate of return on equity = 12%

Calculate:

a. The before-tax and after-tax cash flows for each year of the holding period and the before-tax and after-tax equity reversion.

b. The after-tax net present value and after-tax internal rate of return to the investor.

c. The profitability index (this is calculated on an after-tax basis).

d. Should we invest in this project? Explain.

Answer 1

number of units          =30 units.

Market rent per unit =$475 per month.

Increase in rent per year =6% per year.

Rent per year is calculated as $475per month for 12 months and for 30 apartments.

=$475*12*30

=$171000

Annual increment in rent is 6%, so for the following years rent is-

Particular 1st year 2nd year 3rd year 4th year	Anticipated rent       $171000.00       $ 181260.00       $192135.60       $ 203663.74

Loan value =1,8,00,000 * 80% =$14,40000.

Down payment =240,000.

Points charged =3

therefore, cash paid at the time of disbursal of the loan =$1,4,40,000 * 3%

=$43,200.

EMI =PMT(rate,nooyr,pv)

=PMT(.055,25,1440000)

=$107351.33

Loan schedule for four years is as below:

Year	Principal outstading at the beginning of the year	Interest	EMI	Principal repayment	Principal at the end of the year
1	$1,440000.00	$79200.00	$107351.33	$28151.33	$1411848.67
2	$1411848.67	$77651.68	$107351.33	$29699.65	$1382149.02
3	$1382149.02	$76018.96	$107351.33	$31332.37	$1350816.65
4	$1350816.65	$74294.91	$107351.33	$33056.41	$1317760.24

Prepayment fees =$1317760.24*2% =$26355.20

Value of the property at the end of holding period:

Particulars	First year	second year	3 rd year	4th year
Value of the property at the end of	$1872000.00	$1946880.00	$2024755.20	$2105745.41

Selling expenses of the property in the year of sale =5% of $2105745.41

=$105287.27