If you recall (from Problem Set 2), Mr. Arnold Benedict is thinking of buying an apartment complex that is offered for sale by the firm of Getabinder and Flee. The price, $2.25 million, equals the propertys market value. Further, Mr. Benedict can obtain a $1,500,000 loan with terms of interest at 8.5 percent per annum, level annual payments, to amortize the loan over 20 years. There are no points or loan amortization fees anticipated.

He has obtained the following estimates from an investment analyst for the BTCF and ATCF (before and after-tax cash flows) for the five year holding period (as well as the reconstructed income statement for period 0). In addition, he has the BTER and ATER (before and after-tax equity reversion) for the property assuming it is sold at the end of the 5 year holding period. This information is shown below (this is taken from the solution for question #2 from Problem Set 2):

	Year 0	YR1	YR2	YR3	YR4	YR5
PGI	309600	316566	323689	330972	338419	346033
-Vacancy	21672	22160	22658	23168	23689	24222
+Misc Income	7500	7669	7841	8018	8198	8383
EGI	295428	302075	308872	315822	322928	330194
-Operating Exp	45148	46164	47203	48265	49351	50461
-M. Fee	14771	15101	15444	15791	16146	16510
-Property Taxes	76374	76374	76374	76374	76374	76374
NOI	159135	164433	169851	171718	177383	183175
-Debt Service		158506	158506	158506	158506	158506
BTCF		5927	11345	13212	18877	24669

NOI		164433	169851	171718	177383	183175
-Interest		127500	124864	122005	118902	115536
-Depreciation		62730	65448	65448	65448	62730
-P. Penalty		0	0	0	0	0
-Discount Exp		0	0	0	0	0
Passive Income		-25797	-20461	-15735	-6967	4909
Pass Through		25000	25000	25000	25000	25000
Other Passive		0	0	0	0	0

S. Losses		797	797	797	797	797
Taxable Income		-25000	-20461	-15735	-6967	4112
x MTR		.40	.40	.40	.40	.40
TAX		-10000	-8184	-6294	-2787	1645

BTCF		5927	11345	13212	18877	24669
-TAX		-10000	-8184	-6294	-2787	1645
ATCF		15927	19529	19506	21664	23024

ESP	2590877
-SE	207270
NSP	2383607
-UMB	1316277
BTER	1067330
-TAX	100492
ATER	966838

NSP	2383607
-Adjusted Basis	1928196
Total Gain on Sale	455411
-Depreciation Recovery	321804
Capital Gain on Sale	133607

Depreciation Recovery	321804
x Dep Recovery Tax Rate	.25
Depreciation Recovery Tax	80451

Capital Gains	133607
x Capital Gains Tax rate	.15
Capital Gains Tax	20041

Suspended Losses	0
x Marginal Tax Rate	.40
Suspended Losses Recapture	0

Mr. Arnold Benedict has asked you to compute the following investment indicators and further to advise him on whether he should purchase this property. Please compute the following:

a. Using the first-year operating forecast, compute:

1) Gross income multiplier (using effective gross income)

2) Net income multiplier

3) Operating ratio

4) Break even, or default, ratio

5) Debt coverage ratio

6) Overall capitalization rate

7) Equity dividend rate

8) Cash-on-cash return

b. Using a 9 percent rate, discount the expected after-tax cash flows from this investment and determine:

1) Net present value

2) Profitability index

3) Investment value

4) Internal rate of return

c. Should Arnold Benedict purchase this building (assuming his after-tax required rate of return is 9 percent)? Explain why or why not.