Discuss potential reasons for price stickiness.

At an equilibrium price of $50 for a barrel of oil,                            [ Select ]                       ["consumer surplus", "surplus", "shortage", "producer surplus"]         exists when buyers were willing to pay prices above $50 and                            [ Select ]                       ["producer surplus", "consumer surplus", "shortage", "surplus"]         exists when sellers were willing to sell at prices below $50.

If price is above equilibrium, such as at $60, this results in a                            [ Select ]                       ["shortage", "surplus", "producer surplus", "consumer surplus"]         .

At an equilibrium price of $50 for a barrel of oil,                            [ Select ]                       ["consumer surplus", "surplus", "shortage", "producer surplus"]         exists when buyers were willing to pay prices above $50 and                            [ Select ]                       ["producer surplus", "consumer surplus", "shortage", "surplus"]         exists when sellers were willing to sell at prices below $50.

If price is above equilibrium, such as at $60, this results in a                            [ Select ]                       ["shortage", "surplus", "producer surplus", "consumer surplus"]         .

Property Assumptions:

Purchase Price:                                                  $4,000000

Year 1 PGI:                                                      $600,000

PGI Growth Rate (Annual):                                3%

Annual Vacancy and Collection Loss (VCL):      5%

Operating Expenses (OER):                               35%

Terminal Capitalization Rate for Sales Price        .09                        Capitalize NOI (Year 4)

Anticipated Holding Period:                               3 Years

Maximum LTV:                                                70%

Interest Rate:                                                     5%

Amortization Period:                                           30 Years

Payments Per Year:                                                  12

Discount (Hurdle) Rate (Unleveraged & levered):       15%

1. What is the Unleveraged IRR and NPV?
2. What is the leveraged IRR and NPV?
3. What is the DCR for Years 1-3?
4. What is the NOI for Years 1-4?
5. What is the “Going In” (aka overall) Capitalization Rate?
6. What is the Cash on Cash (BTCF) for Years 1-3?
7. What is the Mortgage Constant?
8. Based on the NPV’s and IRR’s (unleveraged and leveraged, hurdle rates), do you recommend purchasing this property? Please explain.

Property Assumptions

Purchase Price:                                                                        $12,500,000

Year 1 Potential Rental Income (PRI):                                    $1,650,000

PGI annual growth rate:                                                          3%

Annual Vacancy and Credit Loss (VCL):                               5%

            Over next 6yrs.

Year 1 operating expenses (OER): (Oper. Expense Ratio)     35%

OPEX annual growth rate (after year 1):                                 2%

Sales Price :     Terminal Cap Rate                                           .09

Capitalize 6^th yr. NOI

Sales Costs: Commissions                                                      3% of Sales Price

Anticipated holding period                                                      5 years

Maximum loan-to-value (LTV) ratio:                                      75%

Interest Rate:                                                                           5.25%

Amortization Period:                                                               20 years

Payments per year:                                                                  12

Investors’ Hurdle Rate (unleveraged)                                     12%

Investors’ Hurdle Rate (leveraged)                                         15%

1. What is the Operating Expense Ratio for years 1-6?
2. What is the Unleveraged IRR and NPV?
3. What is the leveraged IRR and NPV?
4. Do you recommend purchasing this property? Explain

What are advantages and disadvantages of the price system?