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You are considering the acquisition of a small office building. The purchase price is $775,000. Seventy-five percent of the purchase price can be borrowed with a 30-year, fully amortized mortgage with a 7.5% interest rate. Payments will be made annually. Up-front financing cost will total 3% of the loan amount. The expected before-tax cash flows from operations, assuming a 5-year holding period, are as follows:
Year BTCF
1 $48,492
2 $53,768
3 $59,282
4 $65,043
5 $71,058
The BTCF from the sale of the property is expected to be $295,050.
a) What is the net present value (NPV) of this investment assuming a 12% required rate of return on levered cash flows?
b) What is the levered internal rate of return?
You have just received a windfall from an investment made in a friend's business. He will be paying you $10,000 at the end of this year, $20,000 at the end of the following year, and $30,000 at the end of the year after that (three years from today)...
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