Reference no: EM131934680

An investor is considering an investment that has a Market Value of $2.5millions. The following information can be obtained: Rent = $1,300 per unit per month. Rental Growth Rate = 3% per year compounded. Number of units = 25 Vacancy rate is 8%. Operating expenses = $150,000. Operating Expense Growth Rate = 3% per year compounded. Loan-to-value ratio is 80%. Interest rate on mortgage is 5% per annum. Maturity of mortgage = 15 years (with monthly payments). Financing Costs = $25,000 amortized over life of the mortgage. Depreciable basis = 75 percent of total cost Depreciable life = 27.5 years (use 25% max for DEPR tax and 15% for CG tax) Expected appreciation rate = 3% per year, compounded. Anticipated Holding period = 10 years The marginal tax rate of investor is 34%. Expected Selling Expenses = 6%. Required after-tax Return on Equity = 11%. a) Calculate the NPV and IRR for the project on after-tax basis. (40%) b) Calculate the following 6 rules of thumb for the first year: Potential Gross Income Multiplier (PGIM); Capitalization Rate(R), Operating Expense Ratio (OER), Equity Dividend Rate (EDR); Debt Coverage Ratio (DCR); and Break-even Cash Flow Ratio (BER), for the project. Give your reactions on the calculated rules of thumb with respect to the investment decision! (18%) c) Calculate the Brokers’ Rate of Return (rule of thumb) based on the cash flows in problem 1(a), above. (5%) d) Based on the results on (a), (b), and (c) above, will you recommend this project to the equity investor (your client)? Why?