Calculate the investor before-tax IRR

Assignment Help Financial Management

Reference no: EM131989994

A property is expected to have NOI of $100,000 the first year. The NOI is expected to increase by 3 percent per year thereafter. Assume that the appraiser would estimate the value in year 10 by using a 10 percent capitalization rate. The appraised value of the property is currently $1 million and the lender is willing to make a 90 percent LTV loan with a contract interest rate of 9 percent, and it will be amortized with fixed monthly payments over a 20-year term. It will be a convertible mortgage loan that will give the lender the option to convert the mortgage balance into a 60 percent equity position at the end of year 10. That is, instead of receiving the payoff on the mortgage, the lender would own 60 percent of the property. Assume that the borrower will default if the property value is less than the loan balance in year 10, in which case the property is transferred to the lender.

a. Calculate the investor’s before-tax IRR. Show and explain all calculations. Should the building be purchased? Why or why not?

b. Calculate the lender’s IRR. Show and explain all calculations.

c. Calculate the lender’s IRR if the property instead sells for only $1 million after 10 years. Show and explain all calculations.

d. Calculate the lender’s IRR if the property instead sells for only $500,000 after 10 years. Show and explain all calculations.

Reference no: EM131989994

Questions Cloud

Thinking about replacing an old computer : Suppose we are thinking about replacing an old computer with a new one. The old one cost us $650,000; the new one will cost $780,000.

Calculate the internal rate of return-IRR : Calculate the internal rate of return—IRR. Calculate the net present value—NPV—at the following required rates of return

Observe portfolio for five years : You observe a portfolio for five years and determine that its average return is 12% and the standard deviation of its returns is 20%.

What is the investments of fv at rates : What is the investments of fv at rates of 0%,5% and 20% after 0,1,2,3,4 and 5 years.

Calculate the investor before-tax IRR : Calculate the investor’s before-tax IRR. Calculate the lender’s IRR.

What lump sum do parents need to deposit in account earning : What lump sum do parents need to deposit in an account earning 15%, compounded monthly, so that it will grow to $60,000 for their son's college fund in 16 years

Additional financing will be required to support sale growth : How much additional financing will be required to support sales growth from $900,000 per year to $1,500,000 per year.

Arbitrage opportunity according to the interest rate parity : Is there an arbitrage opportunity according to the Interest Rate Parity based on the above information?

The fisher effect has all of the components : The Fisher Effect has all of the following components, except:

User Account

All Pages