Exam 19: Investment Decisions: NPV and IRR

Suppose you purchased an income producing property for $95,000 five years ago.In Year 1,you were able to negotiate a lease that paid $10,000 per year at the end of each year.If you are able to sell the property at the end of year 5 for $100,000 (after receiving our final lease payment),what was the internal rate of return (IRR)on this investment?

Given the following information regarding an income producing property,determine the after tax net present value (NPV).Expected Holding Period: 5 years;1^st year Expected BTCF: $30,656;2^nd year Expected BTCF: $33,329;3^rd year Expected BTCF: $36,082;4^th year Expected BTCF: $38,918;5^th year Expected BTCF: $41,839;1^st year Expected Tax Liability: $7,645;2^nd year Expected Tax Liability: $8,658;3^rd year Expected Tax Liability: $9,708;4^th year Expected Tax Liability: $10,798;5^th year Expected Tax Liability: $6,951;Estimated Before Tax Equity Reversion at end of year 5: $343,674;Expected Taxes Due on Sale at end of year 5: $32,032;Required equity investment: $241,163;After Tax Opportunity Cost: 11.2%

An important piece of criteria for investors to consider when deciding between real estate investment opportunities and investing in stocks or bonds is the effect of income taxes on their return.For most investors,the effective tax rate on commercial real estate is:

The internal rate of return (IRR)on a proposed investment is the discount rate that makes the net present value of the investment:

In discounted cash flow (DCF)analysis,the sale price of the property must be estimated at the end of the expected holding period.The most common method for determining the terminal value of the property is the:

Given the following information,calculate the NPV for this property.Initial cash outflow: $200,000,Discount rate: 15%,CF for year 1: $25,876,CF for year 2: $23,998,CF for year 3: $23,013,CF for year 4: $22,105,CF for year 5: $144,670.

Many investors use mortgage debt to help finance capital investment for income-producing real estate.In doing so,the owner will receive income as long as the property produces enough income to cover all operating and capital expenditures,the mortgage payment,and all state and federal income taxes.Therefore,the owner's claim is commonly Referred to as a:

While the general concepts of investment value and market value are very similar,there is an important distinction between the two.All of the following statements regarding investment value are true EXCEPT:

While net present value (NPV)and internal rate of return (IRR)analysis both may be used as investment decision criteria,there are some limitations to the IRR method that make its use as an investment criterion problematic in certain situations.All of the following are limitations of the IRR method EXCEPT:

Given the following information regarding an income producing property,determine the unlevered internal rate of return (IRR).Expected Holding Period: 5 years;1^st year Expected NOI: $89,100;2^nd year Expected NOI: $91,773;3^rd year Expected NOI: $94,526;4^th year Expected NOI: $97,362;5^th year Expected NOI: $100,283;Debt Service in each of the next five years: $58,444;Current Market Value: $885,000;Required equity investment: $221,250;Net Sale Proceeds of Property at end of year 5: $974,700;Remaining Mortgage Balance at end of year 5: $631,026.

It is common for investors in real estate to use mortgage debt to help finance capital investment.The use of debt can have a profound impact on the expected cash flows for a Particular property.Which of the following terms refers to cash flows that represent the property's income after subtracting any payments due to the lender?

Given the following information,calculate the before-tax equity reversion (BTER).NOI: $89,100,Annual Debt Service: $58,444,Net Sale Proceeds: $974,700,Remaining Mortgage Balance: $631,026.

Given the following information,calculate the going-out cap rate.Estimated holding period: 5 years,NOI for year 1: $120,000,NOI for year 5: $150,000,NOI for year 6: $155,250,Expected sale price at end of year 5: $1,350,000.

Changes in the discount rate used to complete net present value analysis can have a significant impact on the estimated value of the investment and therefore affect the overall investment decision.As the required internal rate of return (IRR)increases,the net present value will:

Given the following information,calculate the estimated terminal value of the property at the end of its holding period.Going-out cap rate: 9%,Estimated holding period: 5 years,NOI for year 5: $100,500,NOI for year 6: $102,000.

Given the following information regarding an income producing property,determine the after tax internal rate of return (IRR).Expected Holding Period: 5 years;1^st year Expected BTCF: $30,656;2^nd year Expected BTCF: $33,329;3^rd year Expected BTCF: $36,082;4^th year Expected BTCF: $38,918;5^th year Expected BTCF: $41,839;1^st year Expected Tax Liability: $7,645;2^nd year Expected Tax Liability: $8,658;3^rd year Expected Tax Liability: $9,708;4^th year Expected Tax Liability: $10,798;5^th year Expected Tax Liability: $6,951;Estimated Before Tax Equity Reversion at end of year 5: $343,674;Expected Taxes Due on Sale at end of year 5: $32,032;Required equity investment: $241,163

Given the following information,calculate the appropriate after-tax discount rate.Tax rate on comparable risk investment: 35%,Investor's before-tax opportunity cost: 12%,Capitalization rate: 8%.

Given the following information regarding an income producing property,determine the NPV using levered cash flows in your analysis.Required equity investment: $270,000;Expected NOI for each of the next five years: $150,000;Debt Service for each of the next five years: $125,000;Expected Holding Period: 5 years;Required yield on levered cash flows: 15%;Expected Sale Price at end of Year 5: $2,000,000;Expected Cost of Sale: $125,000;Expected Mortgage Balance at time of sale: $1,500,000

The use of financial leverage when investing in real estate is a double-edged sword.While increased leverage may allow the investor to "purchase" higher expected returns,the "price" of doing so is an increase in which of the following risks?

Just as it is important for an investor to consider the impact of financial leverage on her return,it is also necessary to account for the effect of income taxes.How would the presence of income taxes impact the levered going-in IRR?