1nbsp compare the following mortgages and determine which

Reference no: EM13380925

1. Compare the following mortgages and determine which has the lower cost:

	FRM	ARM
Mortgage amount	$100,000	$100,000
Term	30 years	30 years
Discount points	2.00	3.25
Initial contract interest rate	9.75%	7.75%
Margin	...	2.75
Caps	...	2% annual, 6% lifetime
Index value at outset	...	7.75%
Prepayment	End of year 3	End of year 3

Assume that the ARM rate adjusts from the initial beginning rate and the index has the following values:

BEGINNING OF THE YEAR	INDEX VALUE
1	7.75%
2	9.00
3	10.75

2. Consider a property with expected future net cash flows of $25,000 per year for the next five years (starting one year from now). After that, the operating cash flow should step up 20%, to $30,000, for the following five years.

a. If you expect to sell the property 10 years from now for a price 10 times the net cash flow at that time, what is the value of the property if the required return is 12%?

b. Suppose the seller of the building wants $260,000. Should you do the deal? Why or why not? What is the IRR if you pay $260,000? How does this compare to the required return of 12%?

What is the IRR if you could get the seller to accept $248,075 for the property? What is the
NPV at that price?

c. Suppose that the required return on the property is 11% instead of 12% (in comparison to part b). What would the value of the property be? By what percentage has this value changed as a result of this 100-basis-point change in the required return?

Reference no: EM13380925

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