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…

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%)