Question

Bohemian Apartments can be purchased for $655,000 with initial annual NOI $60,900 that is projected to grow 2.5% annually. Evaluation of the project must be completed using a discount rate of 9%. The loan used in the purchase shall be at 70% LTV, a 5.50% annual interest rate and a 30 year term. Closing costs shall be 3% and cost of sale 6.5%. Project the cash flows for a 5 year hold and determine the NPV of the project and the first year ROI.

Answer 1

	A	Cost of apartment	$655,000
	B	LTV	70%
	C=A*B	Loan amount	$458,500
	Rate	Interest rate	5.50%
	Nper	Number of years of mortgage	30
	Pv	Loan amount	$458,500
	PMT	Annual Repayment	$31,547	(Using PMT function of excel with Rate=5.5%,Nper=30, Pv=-458500)
		Loan Balance at the end of 5 years= Present Value at end of year 5 of Repayment of $31547 per year for balance (30-5)=25 year
		Loan balance at end of 5 years	$423,172.97	(Using PV function of excel with Rate=5.5%,Nper=25, Pmt=-31547)
		Present Value(PV) of Cash Flow=(Cash Flow)/((1+i)^N)
		i=discount rate=9%=0.09
		N=Year of cash Flow
		Initial Investment	$196,500	(655000-458500)
	N	Year	0	1	2	3	4	5
	a	Initial Cash Flow	-$196,500
	b	Net Operating Income (NOI)		$60,900	$62,423	$63,983	$65,583	$67,222
	c	Annual Repayment		($31,547)	($31,547)	($31,547)	($31,547)	($31,547)
		Terminal Cash Flow:
	d	Payment of Loan Balance						($423,173)
	e=d*3%	Closing Cost payment						($12,695)
	f	Sales Price of apartment						$655,000	(Assuming no change in price)
	g=f*6.5%	Cost of Sale						($42,575)
	h=d+e+f+g	Net Terminal Cash Flow						$176,557
	CF=a+b+c+h	Net Cash Flow	-$196,500	$29,353	$30,875	$32,436	$34,035	$212,232	SUM
	PV=CF/(1.09^N)	Present Value of Net Cash Flow	-$196,500	$26,929	$25,987	$25,046	$24,112	$137,936	$43,510
	NPV=Sum of PV	Net Present Value (NPV) of Project	$43,510
	I	Initial Investment	$196,500
	R	First Year Return	$29,353
	R/I	First Year ROI	0.149377755
		First Year ROI	14.94%