Real Estate Principles Study Set 1

Business

Quiz 19 :

Investment Decisions: Npv and Irr

Quiz 19 :

Investment Decisions: Npv and Irr

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Present value:
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B. is the value now of all net benefits that are expected to be received in the future.
d. is also correct.

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A real estate investment is available at an initial cash outlay of $10,000 and is expected to yield cash flows of $3,343.81 per year for five years. The internal rate of return is approximately:
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IRR (Internal Rate of Return) of project is the rate at which the NPV (Net Present Value) of project becomes zero.. It is simple to apply. The project which has IRR greater than its required rate of return should be accepted.
The IRR can be computed using the "IRR" function of spreadsheet
Compute the "IRR" using the spreadsheet. Enter given values and formula in the spreadsheet as shown in the image below.
img Obtained result is provided below.
img Thus, the internal rate of return is
img .
Therefore, the correct answer is
img .

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An office building is purchased with the following projected cash flows: • NOI is expected to be $130,000 in year 1 with 5 percent annual increases. • The purchase price of the property is $720,000. • 100 percent equity financing is used to purchase the property. • The property is sold at the end of year 4 for $860,000 with selling costs of 4 percent. • The required unlevered rate of return is 14 percent. a. Calculate the unlevered internal rate of return ( IRR ). b. Calculate the unlevered net present value ( NPV ).
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img
a. IRR = 21.88 percent
b. NPV = 173,732

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State, in no more than one sentence, the condition for favorable financial leverage in the calculation of NPV.
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What is the IRR, assuming an industrial building can be purchased for $250,000 and is expected to yield cash flows of $18,000 for each of the next five years and be sold at the end of the fifth year for $280,000
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An income-producing property is priced at $600,000 and is expected to generate the following after-tax cash flows: Year 1: $42,000; Year 2: $44,000; Year 3: $45,000; Year 4: $50,000; and Year 5: $650,000. Would an investor with a required after-tax rate of return of 15 percent be wise to invest at the current price
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The internal rate of return equation incorporates:
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The purchase price that will yield an investor the lowest acceptable rate of return is:
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As a general rule, using financial leverage:
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Why might a commercial real estate investor borrow to help finance an investment even if she could afford to pay 100 percent cash
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Using the CFj key of your financial calculator, determine the IRR of the following series of annual cash flows: CF 0 = - $31,400; CF 1 = $3,292; CF 2 = $3,567; CF 3 = $3,850; CF 4 = $4,141; and CF 5 = $50,659.
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You are considering the purchase of an apartment complex. The following assumptions are made: • The purchase price is $1 million. • Potential gross income ( PGI ) for the first year of operations is projected to be $171,000. • PGI is expected to increase 4 percent per year. • No vacancies are expected. • Operating expenses are estimated at 35 percent of effective gross income. Ignore capital expenditures. • The market value of the investment is expected to increase 4 percent per year. • Selling expenses will be 4 percent. • The holding period is four years. • The appropriate unlevered rate of return to discount projected NOI s and the projected NSP is 12 percent. • The required levered rate of return is 14 percent. • 70 percent of the acquisition price can be borrowed with a 30-year, monthly payment mortgage. • The annual interest rate on the mortgage will be 8 percent. • Financing costs will equal 2 percent of the loan amount. • There are no prepayment penalties. a. Calculate net operating income ( NOI ) for each of the four years. b. Calculate the net sale proceeds from the sale of the property. c. Calculate the net present value of this investment, assuming no mortgage debt. Should you purchase Why d. Calculate the internal rate of return of this investment, assuming no debt. Should you purchase Why e. Calculate the monthly mortgage payment. What is the total per year f. Calculate the loan balance at the end of years 1, 2, 3, and 4. ( Note: The unpaid mortgage balance at any time is equal to the present value of the remaining payments, discounted at the contract rate of interest). g. Calculate the amount of principal reduction achieved during each of the four years. h. Calculate the total interest paid during each of the four years. (Remember: Debt service = Principal + Interest.) i. Calculate the (levered) required initial equity investment. j. Calculate the before-tax cash flow ( BTCF ) for each of the four years. k. Calculate the before-tax equity reversion ( BTER ) from the sale of the property. l. Calculate the (levered) net present value of this investment. Should you purchase Why m. Calculate the (levered) internal rate of return of this investment. Should you purchase Why n. Calculate, for the first year of operations, the (1) Overall (cap) rate of return. (2) Equity dividend rate. (3) Gross income multiplier. (4) Debt coverage ratio.
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State, in no more than one sentence, the condition for favorable financial leverage in the calculation of the IRR.
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A retail shopping center is purchased for $2.1 million. During the next four years, the property appreciates at 4 percent per year. At the time of purchase, the property is financed with a 75 percent loan-to-value ratio for 30 years at 8 percent (annual) with monthly amortization. At the end of year 4, the property is sold with 8 percent selling expenses. What is the before-tax equity reversion
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List three important ways in which DCF valuation models differ from direct capitalization models.
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Which of the following is the least true
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With a purchase price of $350,000, a small warehouse provides for an initial before-tax cash flow of $30,000, which grows by 6 percent a year. If the before-tax equity reversion after four years equals $90,000, and an initial equity investment of $175,000 is required, what is the IRR on the project If the required going-in levered rate of return on the project is 10 percent, should the warehouse be purchased
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What term best describes the maximum price a buyer is willing to pay for a property
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You are considering the acquisition of small office building. The purchase price is $775,000. Seventy-five percent of the purchase price can be borrowed with a 30-year, 7.5 percent mortgage. Payments will be made annually. Up-front financing costs will total 3 percent of the loan amount. The expected before-tax cash flows from operations, assuming a five-year holding period, are as follows: img The before-tax cash flow from the sale of the property is expected to be $295,050. What is the net present value of this investment, assuming a 12 percent required rate of return on levered cash flows What is the levered internal rate of return
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The net present value of an acquisition is equal to:
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