Suppose you are considering the acquisition of a hotel that is currently trading at $ 67 million.
Question:
Suppose you are considering the acquisition of a hotel that is currently trading at $ 67 million. The current return on such investments on the market is estimated at 10%. The investor’s required rate of return is of 11%. The asset's (annual) NOI for the next 5 years [i.e. the current lease term) is $ 6,000,000. At the end of the current lease, you expect the NOI to increase to $ 6,500,000 for the foreseeable future. You anticipate selling the property five years from today. The building to land value ratio is 3:1 and the depreciable life of the property is 39 years. You contacted your banker who is willing to give you a LTV of 80%. The mortgage loan details are: 7.5% 30-year monthly amortizing loan. The tax rates are as follows: 22% income tax, 25% depreciation recapture tax, 20% capital gains tax. Consider straightline depreciation. The going-in Cap rate is 7%. 5 years later, 50bps additional risk premium should be applied to estimate the going-out cap rate. The cost of sales( and purchase) is 3%.
1. What is the taxable income in year 4?
a) $ 832,534
b) $ 2,120,996
c) $ 4,093,195
d) $ 183,158
2. On the basis of the data provided at question 6, what is the overall gain during the sale of the property?
a) $ 10,600,000
b) $ 17,042,308
c) $ 23,508,974
d) $ 19,422,308
3. On the basis of the data provided at question 6, how much (in $) is the capital gain tax?
a) $ 6,671,785
b) $ 1,824,632
c) $ 3,413,333
d) $ 9,123,160
4. On the basis of the data provided at question 6, calculate your IRR based on BTCF.
a) 18.11%
b) 24.17%
c) 25.27%
d) 25.72%
5. On the basis of the data provided at question 6, calculate your IRR based on ATCF.
a) 17.61%
b) 19.92%
c) 21.12%
d) 22.12%
Investment Analysis and Portfolio Management
ISBN: 978-0538482387
10th Edition
Authors: Frank K. Reilly, Keith C. Brown