Reference no: EM133165328

Question - Assume that you are an investment analyst preparing an analysis of an investment opportunity for a client. Your client is considering the acquisition of an office complex from a developer at the point in time when the offices are ready for occupancy. You have the following information. The purchase price is $800,000 with acquisition costs of $25,000. The project is a two-story office building containing 12,000 leasable square feet. The rents are expected to be $6.00 per square foot per year and are expected to increase 5% per year. The vacancy rate is expected to be 8% each year. The project has concession vendors that generate other income in the amount of 8% of gross revenue. Operating expenses are estimated at 45% of gross revenue each year. Of the purchase price, 80% can be borrowed with a 20-year, annual payment mortgage at an interest rate of 12% plus 2% financing costs. The loan has a prepayment penalty of 4% of the outstanding balance. Of the total cost, 85% is depreciable. The value of the investment is expected to increase 5% per year. Selling expenses are expected to be 8% of the selling price. The investor plans to hold the property for five years. He is in a 28% tax bracket and requires a 14% return on equity.

Required - Calculate the after-tax cash flows from operations for each year of the holding period and the after-tax equity reversion.