Suppose that you are contemplating an investment in an apartment building. Use the information provided 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?