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Real Estate Finance, Financial Management

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1. Consider the following cash flows and reversion:

There is an $80,000 cash outflow at time zero. BTCFs for years 1-4, respectively, are $10,000, $20,000, $20,000, and $25,000. BTER for year 4 equals $50,000.

A) Calculate the NPV of equity if the required rate of return equals 10%.

B) Recalculate the NPV of equity if the required rate of return equals 15%.

C) Calculate the internal rate of return.

D) Should all investors accept this project?


2. Consider the following cash flows and reversion:

BTCFs for years 1-6, respectively, are $10,000, $10,500, $12,000, $11,000, $13,000, and $10,000. BTER for year 6 equals $140,000. What is the maximum that the investor can pay to earn a 15% rate of return?


3. Consider an apartment complex investment with a $500,000 purchase price. On a before-tax basis, should the investor buy the project? Why or why not?

A. First year’s gross rents = $500 per unit per month; there are 20 units
B. Vacancies and bad debts are expected to be 7% of PGI
C. First year’s operating expenses = $48,000
D. LTV ratio = 80% on a 10% mortgage for 25 years with monthly compounding
E. Depreciable basis = 85% of the purchase price
F. Future sale price = $550,000
G. Holding period = 60 months
H. Marginal tax rate = 28%; Capital gains rate = 15%
I. Require rate of return = 16%
J. Growth rates: Gross rents = 5% per year; Operating expenses = 5% per year
K. Financing costs = $16,000; Acquisition costs = $0
L. Prepayment penalty = 6%


Problem Set #3: The Refinance Decision

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Five years ago you originated a $50,000 mortgage loan at 12% for 30 years with monthly compounding. Because rates are currently 10%, you are considering refinancing the unpaid mortgage balance of your existing loan for 25 years with monthly compounding. Your current loan has a 2% prepayment penalty and the new lender will charge you $1,000 in refinancing costs. Assume your opportunity cost of capital equals 12%. Should you refinance if the new loan is held to maturity?

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