Practice Problem Exam II

You are considering purchasing an apartment for \$1,400,000 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 \$450 per month and the two bedroom apartments are expected to rent for \$600 per month. You expect rents to increase by 4% per year. You project that your vacancy and collection losses will be about 5%. You expect that operating expenses will be 30% of the adjusted gross income. The Friendly Federal Savings Bank has agreed to lend to you at a 8.50% 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 31% 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 11.5% capitalization rate of the year six NOI. Sales expenses are projected at 7%. Your cost of equity capital is 12%. The expected closing date for the purchase of the property is in March.

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

 Loan Amount \$1,054,044.14 PDS 8104.69 Annual Debt Service \$ 97,256.25

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. (4 points)

 1 2 3 4 5 ADS 97,256.25 97,256.25 97,256.25 97,256.25 97,256.25 Interest 89,288.07 88,583.76 87,817.19 86,982.86 86,074.79 Principal 7,968.18 8,672.49 9,439.06 10,273.39 11,181.46 EYR Bal. 1,046,075.96 1,037,403.47 1,027,964.40 1,017,691.01 1,006,509.55

3. How much equity cash is required? (2 points)

 Cost 1,400,000.00 Less MTG 1,054,044.14 Plus PTS 31,621.32 Cash Req. 377,577.19

4. Project the expected after tax cash flows for each of the five years of the holding period. Also project the sixth year NOI. (10 points)

 1 2 3 4 5 6 GPI 234000 243360 253094 263218 273747 284697 Less V&C 11700 12168 12655 13161 13687 14235 Adj Gross 222300 231192 240440 250057 260060 270462 Less Exp. 66690 69358 72132 75017 78018 81139 NOI 155610 161834 168308 175040 182042 189323 Less ADS 97256 97256 97256 97256 97256 BTCF 58354 64578 71052 77784 84785 Less Int. 89288 88584 87817 86983 86075 Less Dep. 32242 40727 40727 40727 40727 Less Pts. 3162 3162 3162 3162 3162 Tax Inc. 30917 29361 36601 44168 52077 Tax 9584 9102 11346 13692 16144 ATCF 48769 55476 59705 64092 68641

5. What is the after tax cash flow from reversion? (4 points)

 Sale Price 1646290.07 Basis Less S/E -115240.30 Cost 1400000 A/R 1531049.77 Acc. Depr. 195,152 Less Mtg -1006509.55 A/B 1,204,848 BTCFr 524540.22 A/R 1531049.77 Less A/B -1204848.48 Tax. Gain 326201.28 -Unex Pts -15810.66 Tax Inc 310390.62 Taxes 96221.09 ATCFr 428319.12

6. What is the NPV for this investment? (3 points)

 0 1 2 3 4 5 Eq. Cash -377577 CFoper. 48769 55476 59705 64092 68641 CFrev 428319 TCF -377577 48769 55476 59705 64092 496961 NPV \$75,409.36