Suppose that you are contemplating an investment in an apartment building. Use the informationprovided below to answer the questions that follow:
Type of Property:
Apartment Building
Number of Units:30
Average Rent:$1,500 per unit per month
Expected Growth in Rents:5% per year
Vacancy and Collection Losses:5% of Potential Gross Income
Other Income:$50 per unit per month
Expected Growth in Other Income: 3% per year
Operating Expenses:35% of Effective Gross Income
Capital Expenditures:4% of Effective Gross Income
Selling Expenses:5% of Future Selling Price
Going-Out Cap Rate:6.5%
Expected Purchase Price:$5.25 million
Loan Terms:
Loan Amount:85% of purchase price
Interest Rate:4.5% per year with monthly payments and monthly
compounding
Amortization Term:30 years
a. What is the net present value of the before-tax unlevered cash flows if you assume a five-year holding period and a discount rate of 12%?
b. What is the internal rate of return of the before-tax levered cash flows if you still assume a five-year holding period?