Case Problem 3

You are considering purchasing an apartment for $1,500,000 which contains 30 one bedroom apartments and 10 two bedroom apartments. Land is estimated to be 20% of the purchase price. The one bedroom apartments are expected to rent for $515 per month and the two bedroom apartments are expected to rent for $615 per month. You expect rents to increase by 5.25% per year. You project that your vacancy and collection losses will be about 4.75%. You expect that operating expenses will be 31% of the adjusted gross income. The Friendly Federal Savings Bank has agreed to lend to you at a 8.25% annual interest rate with an amortization period of 30 years paid monthly. The loan will have only a term of 10 years. The amount of the loan is going to be based upon a 1.6 Debt Service Coverage Ratio for the first year's NOI. The bank is going to charge three points. Your accountant has advised you that for this investment analysis, you should use expect a 28% marginal tax rate. You expect to sell the property at the end of the fifth year. The sales price is expected to be based upon an 11% capitalization rate of the year six NOI. Sales expenses are projected at 6.75%. Your cost of equity capital is 10.75%. The expected closing date for the purchase of the property is in October.

1. What is the loan amount and the monthly and annual debt service? (2 points)

2. Prepare an amortization schedule for the initial loan for the first five years which shows the annual debt service, the annual interest charge, the principal paid, and the balance at the end of the year.

3. How much equity cash is required?

4. Project the expected after tax cash flows for each of the five years of the holding period. Also project the sixth year NOI.

5. What is the before tax cash flow from reversion?

6. What is the NPV for this investment?

0

1

2

3

4

5

8. What is the indicated financial manager's rate of return (FMRR)? (2 points)

FMRR=

Initial Cost

Terminal Value

Last Name

First Name

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