Calculate the levered required initial equity investment

Assignment Help Financial Management

Reference no: EM131903912

You are considering the purchase of an apartment complex. The following assumptions are made:

• The purchase price is $1,050,000.

• Potential gross income (PGI) for the first year of operations is projected to be $175,000.

• PGI is expected to increase at 3.5 percent per year.

• 5% vacancies are expected.

• Operating expenses are estimated at 45 percent of effective gross income. Capital expenditures are estimated at 15 percent of effective gross income.

• The market value of the investment is expected to increase 5.25 percent per year.

• Selling expenses will be 4.25 percent.

• The holding period is 4 years.

• The appropriate unlevered rate of return to discount projected NOIs and the projected NSP is 12.5 percent.

• The required levered rate of return is 14 percent.

• 70 percent of the acquisition price can be borrowed with a 30-year, monthly payment mortgage.

• The annual interest rate on the mortgage will be 7.5 percent.

• Financing costs will equal 3.5 percent of the loan amount.

• There are no prepayment penalties.

a. Calculate net operating income (NOI) for each of the four years.

b. Calculate the net sale proceeds from the sale of the property.

c. Calculate the net present value of this investment, assuming no mortgage debt. Should you purchase? Why?

d. Calculate the internal rate of return of this investment, assuming no debt. Should you purchase? Why?

e. Calculate the monthly mortgage payment. What is the total per year?

f. Calculate the loan balance at the end of year 4.

g. Calculate the levered required initial equity investment.

h. Calculate the before-tax cash flow (BTCF) for each of the four years.

i. Calculate the before-tax equity reversion (BTER) from the sale of the property.

j. Calculate the levered net present value of this investment. Should you purchase? Why?

k. Calculate the levered internal rate of return of this investment (assuming no debt and no taxes). Should you purchase? Why?

Reference no: EM131903912

Questions Cloud

The leverage change affect the firm market value : How would that change the firm’s WACC? How would the leverage change affect the firm’s market value?

Flounder fashions needs to replace beltloop attacher : Flounder Fashions needs to replace a beltloop attacher that currently costs the company $40,000 in annual cash operating costs.

Purchase of new machine for production of latex : Vandalay Industries is considering the purchase of a new machine for the production of latex.

Requires initial fixed asset investment : Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $5.886 million

Calculate the levered required initial equity investment : Calculate net operating income (NOI) for each of the four years. Calculate the levered required initial equity investment.

What is the project year zero net cash flow : What is the project's year 0 net cash flow? What is the NPV? What is the project's year 2 net cash flow?

What is the irr for project : Your firm is contemplating the purchase of a new $1,344,000 computer-based order entry system. If the tax rate is 30 percent, what is the IRR for this project?

What was wallace total long-term debt : What was Wallace's total long-term debt in 2016? How much new long-term debt financing will be needed in 2017?

Based on the interest rate parity condition : Based on the interest rate parity condition, what must the FX market have expected about the ($/euro) exchange rate by Jan 1, 2018?

User Account

All Pages