Reference no: EM13574091

You are considering the purchase of an apartment complex. The following assumptions are made:

• The purchase price is $1,000,000.
• Potential gross income (PGI) for the first year of operations is projected to be $171,000.

PGI is expected to increase at 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 4 years.
• The appropriate unlevered rate of return to discount projected NOIs 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 8.0 percent.
• Financing costs will equal 2 percent of the loan amount.
• There are no prepayment penalties.

a. Calculate the levered required initial equity investment.

b. Calculate the before-tax cash flow (BTCF) for each of the four years.

c. Calculate the before-tax equity reversion (BTER) from the sale of the property.

d. Calculate the levered net present value of this investment. Should you purchase? Why?