Reading 73: Alternative Investments Losf习题精选 2010, net, investment, building, border

honeycfa

LOS f: Calculate the net operating income (NOI) from a real estate investment.

The gross rental income for an apartment building allowing for vacancies is $500,000. Estimated expenses total $200,000. If the capitalization rate is 10%, the value of this building using the direct capitalization approach is closest to:

A) $3,000,000.

B) $3,500,000.

C) $2,500,000.

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NOI = 500,000 ? 200,000 = 300,000

MV = NOI / Capitalization rate = 300,000 / 0.10 = 3,000,000

 

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captone

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honeycfa

An investor purchases an office building for $2,500,000. He puts 10 percent down and finances the remainder at a 9 percent rate of interest. Calculate the first year’s after-tax cash flow for the investment using the following information:

NOI	$243,000
Depreciation	$25,000
Annual mortgage payment	$218,000
Marginal income tax rate	28%

A) $11,160.

B) $18,000.

C) $20,660.

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The first year’s interest payment is the amount borrowed ($2,250,000) times the rate of interest (9%), which equals $202,500. After-tax net income, which is NOI minus depreciation minus interest, net of taxes, is ($243,000 - $25,000 - $202,500) × (1 - 0.28) = $11,160. After-tax cash flow is after-tax net income, plus depreciation and minus the principal component of the mortgage payment ($218,000-$202,500): $11,160 + $25,000 - $15,500 = $20,660.

honeycfa

An investor made the following purchase:

• Bought an office building for $500,000 using 90% financing.
• The borrowing cost was 10%.
• They received $29,000 at year-end from rentals.
• They sold the building for $520,000 at the end of the year.

Assuming a flat tax rate on income and capital gains of 25% what was the return on equity?

A) +6%.

B) -3%.

C) +10%.

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Equity = 500,000(0.10) = 50,000

Interest cost = 450,000 (0.10) = 45,000

Capital Gain = 520,000 - 500,000 = 20,000

ATCF = (Income + Capital Gain - Interest)(1 - tax rate)

ATCF = (29,000 + 20,000 - 45,000)(1 - 0.25) = $3,000

ROE = ATCF / Equity = 3,000 / 50,000 = 0.06 or 6%

honeycfa

Ron Biggs is considering a real estate investment. In the first year, the property is expected to generate revenue of $65,000. The expense in the first year is $25,000 and the depreciation allowance will be 2.6 percent of the $350,000 initial investment. Assuming all cash flows occur at the end of the year and Biggs expects to be in a 35 percent marginal tax bracket, the after-tax cash flow in year 1 is closest to:

A) $30,900.

B) $29,185.

C) $20,085.

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After-tax cash flow = (revenue – cost – depreciation)(1 – t) + depreciation.
Depreciation = 0.026 × $350,000 = $9,100.
CF = ($65,000 – $25,000 – $9,100)(1 – 0.35) + $9,100 = $29,185.

honeycfa

A real estate speculator is considering an investment in a piece of raw land that will be developed. He expects to invest $150,000 in the land. It will not be developed for three years, but at the end of year 3, he expects a cash flow of $25,000. In years 4 and 5, the cash flow will increase to $35,000, and at the end of year 5 he expects to sell the land for $185,000. Due to the risky nature of the investment, he requires an 18% return.

The net present value of this investment is closest to:

A) -$20,568.

B) -$32,903.

C) $30,222.

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CF₀ = –150,000
CF₁ = 0
CF₂ = 0
CF₃ = 25,000
CF₄ = 35,000
CF₅ = (35,000 + 185,000) = 220,000
I/Y = 18; CPT → NPV = –$20,567.90

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The internal rate of return (IRR) is closest to:

A) 12.6%.

B) 14.3%.

C) 18.1%.

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CF₀ = –150,000
CF₁ = 0
CF₂ = 0
CF₃ = 25,000
CF₄ = 35,000
CF₅ = 220,000
CPT → IRR = 14.3%.

honeycfa

An investor purchases a property for $1,000,000, financing 92% of the purchase price. He plans to sell the property four years later for $1,200,000. The expected net cash flows for the investment are as follows:

Year 1	$23,450
Year 2	$25,312
Year 3	$27,879
Year 4 (net of mortgage payoff)	$261,450

Assuming a 9% cost of equity, the net present value (NPV) of the cash flows at the time the property is purchased is:

A) $338,091.

B) $249,564.

C) $169,564.

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The present value of the cash flows is: $23,450 / 1.09 + $25,312 / 1.09² + $27,879 / 1.09³ + 261,450 / 1.09⁴ = $249,563.83. The NPV is the present value of the cash flows minus the initial investment: $249,564 – $80,000 = $169,564.

honeycfa

John Williams wants to purchase an apartment complex. The complex consists of 75 units each renting for $700 per month. The estimated vacancy and collection loss rate is 7%. The insurance for the building is $40,000 annually and taxes are $22,000 annually. Utilities are $18,000 and the maintenance expense is $29,000.

Assume a market cap rate of 11%. Recent sales of nearby apartment complexes have resulted in the following information.

Characteristics	Units	Slope Coefficient in $ per Unit
Proximity to downtown	Miles	-350,000
Vacancy rate	Percent	-500
Building size	Units	+75,000

Williams' proposed apartment complex is 4 miles away from downtown and has an estimated vacancy rate of 6%.

What is the net operating income (NOI) for Williams' proposed apartment complex?

A) $498,900.

B) $436,153.

C) $476,900.

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NOI = (75)(700)(12)(0.93) – $40,000 ? $22,000 ? $18,000 ? $29,000 = $476,900.

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Using the sales comparison approach, the value of the apartment complex is:

A) $4,060,000.

B) $4,222,000.

C) $3,894,500.

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Value = (-350,000)(4) + (-500)(6) + (75,000)(75) = 4,222,000

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Using the income approach, the value of Williams' apartment complex is:

A) $4,525,455.

B) $5,727,273.

C) $4,335,455.

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Appraisal price = NOI / market cap rate = $476,900 / 0.11 = $4,335,454.55

honeycfa

A property has a gross potential rental income of $740,000. Operating expenses, excluding insurance and property taxes, amount to 30% of gross rents. Insurance and property taxes total $16,800. If the market capitalization rate is 22%, the value of this property is closest to:

A) $2,278,000.

B) $1,727,000.

C) $2,431,000.

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Appraised Price = NOI / CAP = [(0.7 × 740,000) ? 16,800] / 0.22 = 2,278,182