FIN 3352 Cash Flow Example

You are considering the purchase of an office building.You have gathered information, surveyed the market, and made predictions.Assume you plan to purchase the property on January 1, 2020 and sell the property on December 31, 2024.Other assumptions:

Total acquisition price:$931,000.

Property consists of 10 office suites, 5 on the first floor and 5 on the second.

Contract rents:5 suites at $1,831 per month and 5 at $1,431 per month.

Annual market rent increases:2.31 % per year (first increase on 01/01/2021)

Vacancy and collection losses:5.31% per year.

Operating expenses: 35% of effective gross income each year.

Capital expenditures: 5.31% of expected gross income each year.

Expected holding period:5 years.

Property value is expected to increase 5.5% per year.

Selling expenses are expected to be 7.31% of selling price.

Loan information:75% LTV, 7.31%, 30 years

Up-front financing costs:3.31% of loan amount.

Depreciation: 90% of the acquisition price

Ordinary income tax rate:22%

Capital gain tax rate:15%

Depreciation recapture rate:25%

After-tax cash flows for years 1-5?