What is the break-event interest rate for this project

Assignment Help Financial Management

Reference no: EM131536256

An investor would like to purchase a new apartment property for $2 million. However, she faces the decision of whether to use 70 percent or 80 percent financing. The 70 percent loan can be obtained at 10 percent interest for 25 years. The 80 percent loan can be obtained at 11 percent interest for 25 years.

NOI is expected to be $190,000 per year and increase at 3 percent annually, the same rate at which the property is expected to increase in value. The building and improvements represent 80 percent of value and will be depreciated over 27.5 years (1/27.5 per year). The project is expected to be sold after five years. Assume a 36 percent tax bracket for all income and capital gains taxes.

a. What would the BTIRR and ATIRR be at each level of financing (assume monthly mortgage amortization?

b. What is the break-event interest rate (BEIR) for this project?

c. What is the marginal cost of the 80 percent loan? What does this mean?

d. Does each loan offer favorable financial leverage? Which would you recommend?

Reference no: EM131536256

Questions Cloud

Average difference in risk-adjusted nominal interests : what should be the average difference in risk-adjusted nominal interests between the two countries?

Use projected cash flows to assess economic exposure : How to use projected cash flows to assess economic exposure? Give arguments for and against hedging?

Discuss impact this has on income statement and shareholders : If a firm is highly leveraged, discuss the impact this has on the Income Statement and the shareholders.

Dividend policy-maximum tax advantage : what should its dividend policy be in Mexico to give it the maximum tax advantage?

What is the break-event interest rate for this project : What is the break-event interest rate (BEIR) for this project? What is the marginal cost of the 80 percent loan? What does this mean?

What is the cost of debt and after tax : Calculate the Components of WACC and the WACC. What is the Cost of Debt? After Tax

While testing occurrence assertion all lending agreements : While testing the occurrence assertion all new lending agreements should ultimately be traced to the

Provide protection against the value of portfolio : What options should be purchased to provide protection against the value of the portfolio falling below 554 million in one year's time?

What is the total present value of your projected sales : Your company wants to finance a new maintenance vehicle. what is the total present value of your projected sales?

User Account

All Pages