An investor is considering an investment that has a Market Value of $2.5millions. The following information can be obtained:
Rent = $1,300 per unit per month. Rental Growth Rate = 3% per year compounded.
Number of units = 25
Vacancy rate is 8%.
Operating expenses = $150,000. Operating Expense Growth Rate = 3% per year compounded.
Loan-to-value ratio is 80%.
Interest rate on mortgage is 5% per annum.
Maturity of mortgage = 15 years (with monthly payments).
Financing Costs = $25,000 amortized over life of the mortgage.
Depreciable basis = 75 percent of total cost
Depreciable life = 27.5 years (use 25% max for DEPR tax and 15% for CG tax)
Expected appreciation rate = 3% per year, compounded.
Anticipated Holding period = 10 years
The marginal tax rate of investor is 34%.
Expected Selling Expenses = 6%.
Required after-tax Return on Equity = 11%.
a) Calculate the NPV and IRR for the project on after-tax basis. (40%)
b) Calculate the following 6 rules of thumb for the first year: Potential Gross Income Multiplier (PGIM); Capitalization Rate(R), Operating Expense Ratio (OER), Equity Dividend Rate (EDR); Debt Coverage Ratio (DCR); and Break-even Cash Flow Ratio (BER), for the project. Give your reactions on the calculated rules of thumb with respect to the investment decision! (18%)
c) Calculate the Brokers’ Rate of Return (rule of thumb) based on the cash flows in problem 1(a), above. (5%)