1. Assume that you are an investment analyst preparing an analysis of an investment opportunity for a client. Your client is considering the acquisition of an apartment complex from a developer at the point in time when the apartments are ready for first occupancy. Your have developed the following information.
- 1) Number of units = 30
- 2) First year market rent per unit = $480 per month
- 3) Rent is projected to increase by 8% each year
- 4) Annual vacancy rate = 3% of PGI
- 5) Annual collection loss = 2% of PGI
- 6) Annual operating expense = 34% of EGI
- 7) Miscellaneous yearly income (parking and washers/dryers) = $1000
- 8) Monthly miscellaneous income is expected to remain constant
- 9) Purchase price = $1,800,000
- 10) Estimated value of land = $300,000
- 11) Anticipated mortgage terms:a) Loan to value ratio = .80 b) Interest rate = 6.5%
c) Years to maturity = 25 d) Points charged = 3 e) Prepayment penalty = 2% of outstanding balance f) Level payment, fully amortized
g) Fixed interest rate, annual payments2
- 12) Anticipated holding period = 4 years
- 13) Proportion by which property is expected to appreciate during the holding period — 5% a year
- 14) Estimated selling expenses as proportion of future sales price = 5%
- 15) Marginal income tax rate for the client = 28%
- 16) It is assumed that the property is put into service on January 1st and sold on December 31st
- 17) Assume the client is “active” in the property management
- 18) It is assumed that the client has an adjusted gross income of $95,000 and has no other passive income not offset by other passive losses (for each year of the anticipated holding period)
- 19) Client’s minimum required after tax rate of return on equity = 13%
- The before-tax and after-tax cash flows for each year of the holding period and the before-tax and after-tax equity reversion.
- The after-tax net present value and after-tax internal rate of return to the investor.
- The profitability index (this is calculated on an after-tax basis).
- Should we invest in this project? Explain.
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