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You are considering the acquisition of a small office building. The purchase price is $775,000. Seventy-five...

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Accounting

  1. You are considering the acquisition of a small office building.The purchase price is $775,000. Seventy-five percent of thepurchase price can be borrowed with a 30-year, 7.50% mortgage.Up-front financing costs will total 3.00% of the loan amount. Theexpected cash flows assuming a 5-year holding period are asfollows:

Year

NOI

1

$48,492

2

$53,768

3

$59,282

4

$65,043

5

$71,058

The cash flow fromthe sale of the property is expected to be $1,000,000.

  1. What is the net present value of this investment, assuming a12.00% required rate of return on levered cash flows?
  2. What is the levered internal rate of return?
  3. What would you need to consider if the numbers in the chartabove represented before tax cash flow?

Answer & Explanation Solved by verified expert
4.0 Ratings (531 Votes)
a b Equity Investment Total Cash Flow PV 12 Present Value Year BTCF beforetax equity reversion at 12 0 21118800 21118800 10000 21118800 1 72316 4849200 08929 4329643 2 455284 5376800 07972 4286352 3 1006684 5928200 07118 4219576 4 1582784 6504300 06355    See Answer
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