Question

1) What is the Present Value using a discount rate of 8% given the following cash flows?

            Year 1:            40,000

            Year 2:            42,000

            Year 3:            44,000

            Year 4:            45,000

            Year 5:            37,000

            And, a sale occurs at the end of year 5 at a price of $425,000.

2) Same facts as #1. Would you pay the asking price of $502,000 ? Yes or no for NPV being positive or negative.

3) Same facts as #1.   If you pay $395,000 for the deal, what is the Internal Rate of Return?

4) If you financed the deal in #3 with a loan at 4.00% at a LTV of 70% over 20 years, what is the annual debt service (calculate the monthly payment and multiply by 12)

5) For the property in #4, what is the cash flow after debt in Yr. 2

In solving problem, please use BAII Plus calculator and show ALL steps in completing problem and ALL steps in using calculator including ALL calculator keys used in chronological order.

Answer 1

(1) Discount Rate = 8 %, Year 1 = $ 40000, Year 2 = $ 42000, Year 3 = $ 44000, Year 4 = $ 45000 and Year 5 = $ 37000, Year 5 Sale Proceed = $ 425000

Total Present Value of Annual Cash Flows = P1 = 40000 / (1.08) + 42000 / (1.08)^(2) + 44000 / (1.08)^(3) + 45000 / (1.08)^(4) + 37000 / (1.08)^(5) + 425000 / (1.08)^(5) = $ 455479.67

(2) Asking Price = $ 502000, NPV = P1 - Asking Prices = 455479.67 - 520000 = - $ 64520.33

(3) Asking Price = $ 395000, let the IRR of the project be R

395000 = 40000 / (1+R) + 42000 / (1+R)^(2) + 44000 / (1+R)^(3) +45000 / (1+R)^(4) + 37000 / (1+R)^(5) + 425000 / (1+R)^(5)

Using the EXCEL's Goal Seek Function/hit and trial method/a financial calculator to solve the above equation, we get:

R = 0.11744 or 11.744 % ~ 11.74%

(4) Loan Interest Rate = 4% per annum or (4/12) = 0.33 % per month, LTV Ratio = 70 %, Tenure = 20 years

Loan = 0.7 x 395000 = $ 276500

Let the monthly payments be $ P

276500 = P x (1/0.0033) x [1-{1/(1.0033)^(240)}]

276500 = P x 165.597

P = 276500 / 165.597 = $ 1669.71

Annual Debt Service = 12 x 1669.71 = $ 20036.5

(5) Year 2 Cash Flow = $ 42000, Annual Debt Service = $ 20036.5

Cash Flow After Debt = 42000 - 20036.5 = $ 21963.5