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You are an employee of University Consultants, Limited, and have been given the following assignment. You are to present an investment analysis of a small retail income-producing property for sale to a potential investor. The asking price for the property is $1,290,000; rents are estimated at $165,120 during the first year and are expected to grow at 2.5 percent per year thereafter. Vacancies and collection losses are expected to be 10 percent of rents. Operating expenses will be 35 percent of effective gross income. A fully amortizing 70 percent loan can be obtained at 7 percent interest for 30 years (total annual payments will be monthly payments × 12). The property is expected to appreciate in value at 3 percent per year and is expected to be owned for five years and then sold.   Required: a. What is the first-year debt coverage ratio? Answer: 1.33 b. What is the terminal capitalization rate? c. What is the investor’s expected before-tax internal rate of return on equity invested (BTIRR)?

You are an employee of University Consultants, Limited, and have been given the following assignment. You are to present an investment analysis of a small retail income-producing property for sale to a potential investor. The asking price for the property is $1,290,000; rents are estimated at $165,120 during the first year and are expected to grow at 2.5 percent per year thereafter. Vacancies and collection losses are expected to be 10 percent of rents. Operating expenses will be 35 percent of effective gross income. A fully amortizing 70 percent loan can be obtained at 7 percent interest for 30 years (total annual payments will be monthly payments × 12). The property is expected to appreciate in value at 3 percent per year and is expected to be owned for five years and then sold.   Required: a. What is the first-year debt coverage ratio? Answer: 1.33 b. What is the terminal capitalization rate? c. What is the investor’s expected before-tax internal rate of return on equity invested (BTIRR)?

Quickbooks Online Accounting
Quickbooks Online Accounting
3rd Edition
ISBN:9780357391693
Author:Owen
Publisher:Owen
Chapter10: Financial Statements And Reports
Section: Chapter Questions
Problem 3.5C
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You are an employee of University Consultants, Limited, and have been given the following assignment. You are to present an investment analysis of a small retail income-producing property for sale to a potential investor. The asking price for the property is $1,290,000; rents are estimated at $165,120 during the first year and are expected to grow at 2.5 percent per year thereafter. Vacancies and collection losses are expected to be 10 percent of rents. Operating expenses will be 35 percent of effective gross income. A fully amortizing 70 percent loan can be obtained at 7 percent interest for 30 years (total annual payments will be monthly payments × 12). The property is expected to appreciate in value at 3 percent per year and is expected to be owned for five years and then sold.

 

Required:

a. What is the first-year debt coverage ratio? Answer: 1.33

b. What is the terminal capitalization rate?

c. What is the investor’s expected before-tax internal rate of return on equity invested (BTIRR)?

d. What is the NPV using a 13 percent discount rate?

e. What is the profitability index using a 13 percent discount rate?

property rents vacancies gross income 165120 operating expenses net op income loan payments net cash flow loan rate nper pv fv PMT 1,290,000 38700 0.7 0.07 30 903000 0 $72,769.52 1,328,700 1,368,561 1,409,618 1,451,906 39861 41056.83 42288.5349 Debt service ratio Terminal Capitalization rate 10% 35% Year 1 165120 16512 148608 52012.8 96595.2 -72770 23825.2 -1.3274 Year 1 2 3 4 5 2.50% 10% 35% 2 173479 177816 182261 169248 16924.8 17347.9 17781.6 18226.1 152323.2 156131.1 160034.4 164034.9 -72770 53313.12 54645.89 56012.04 57412.22 99010.08 101485.2 104022.4 106622.7 Interest $62,919.42 2.50% 10% 35% 3 $62,256.32 26240.08 28715.22 31252.36 33852.69 $61,545.28 $60,782.84 $59,965.29 -72770 -72770 -72770 Principal 2.50% 10% 35% 4 $9,172.76 $9,835.86 $10,546.90 $11,309.33 $12,126.89 Ending Balance 2.50% 10% 35% 5 $893,827.24 $883,991.37 $873,444.48 $862,135.14 $850,008.26
Transcribed Image Text:property rents vacancies gross income 165120 operating expenses net op income loan payments net cash flow loan rate nper pv fv PMT 1,290,000 38700 0.7 0.07 30 903000 0 $72,769.52 1,328,700 1,368,561 1,409,618 1,451,906 39861 41056.83 42288.5349 Debt service ratio Terminal Capitalization rate 10% 35% Year 1 165120 16512 148608 52012.8 96595.2 -72770 23825.2 -1.3274 Year 1 2 3 4 5 2.50% 10% 35% 2 173479 177816 182261 169248 16924.8 17347.9 17781.6 18226.1 152323.2 156131.1 160034.4 164034.9 -72770 53313.12 54645.89 56012.04 57412.22 99010.08 101485.2 104022.4 106622.7 Interest $62,919.42 2.50% 10% 35% 3 $62,256.32 26240.08 28715.22 31252.36 33852.69 $61,545.28 $60,782.84 $59,965.29 -72770 -72770 -72770 Principal 2.50% 10% 35% 4 $9,172.76 $9,835.86 $10,546.90 $11,309.33 $12,126.89 Ending Balance 2.50% 10% 35% 5 $893,827.24 $883,991.37 $873,444.48 $862,135.14 $850,008.26
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