Assume that you are an investment analyst preparing an analysis of an investment opportunity for a client.
Question:
Assume that you are an investment analyst preparing an analysis of an investment opportunity for a client. Your client is considering the acquisition of an apartment complex from a developer at the point in time when the apartments are ready for first occupancy. You have developed the following information.
Number of units | 36 |
First year market rent per unit | $450 per month |
Projected increase in rent | 8% each year |
Annual vacancy rate | 3% of PGI |
Annual collection loss | 2% of PGI |
Annual operating expense | 35% of EGI |
Miscellaneous yearly income (parking and washers or dryers) | $800 |
Monthly miscellaneous income | Expected to remain constant |
Purchase price | $2,000,000 |
Estimated value of land | $500,000 |
Anticipated mortgage terms:
Loan to value ratio | .80 |
Interest rate | 6% |
Years to maturity | 25 |
Points charged | 3 |
Prepayment penalty | 2% of outstanding balance |
Anticipated holding period | 4 years |
Proportion by which property is expected to appreciate during the holding period | 5% a year |
Estimated selling expenses as proportion of future sales price | 5% |
Marginal income tax rate for the client | 28% |
Client's minimum required after tax rate of return on equity | 11% |
Other terms to be considered:
Level payment, fully amortized |
Fixed interest rate, annual payments |
It is assumed that the property is put into service on January 1st and sold on December 31st. It is assumed that the client has an adjusted gross income of $95,000 and has no other passive income not offset by other passive losses (for each year of the anticipated holding period).
Assume the client is "active" in the property management.
Questions:
A. The before-tax and after-tax cash flows for each year of the holding period and the before-tax and after-tax equity reversion.
B. The after-tax net present value and the after-tax internal rate of return.
C. Is this an investment that should be considered? Explain
Financial Statement Analysis
ISBN: 978-0078110962
11th edition
Authors: K. R. Subramanyam, John Wild