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发表于 201242 15:20
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Ernesto Chavez, CFA is a principal in a real estate limited partnership, Luxury Apartments, Inc. and is in the process of evaluating apartment complexes in Fort Worth, Texas for a potential investment. His initial market research has shown good population and income growth in the Fort Worth area, and this property has an excellent track record. Chavez also controls other limited partnerships that hold various properties, including not only apartment complexes, but also office buildings, small strip shopping centers, warehouses, and one small motel. Chavez’s objectives for this investment are to earn returns from income and appreciation and to provide an inflation hedge. Chavez intends that his firm will manage the property themselves since it is a relatively small property. An analyst in the firm, Joe Howard, CFA has prepared a pro forma analysis for the Boat Club Luxury Apartments, one of the properties being evaluated by Luxury Apartments. Below are some of the details of the analysis.
Purchase price:  $1,000,000  NOI in Year 1:  $120,000  NOI growth rate:  3% per year  Depreciation:  $30,000 per year  Initial down payment:  25% of purchase price  Loan terms:  30 year fixed at 4.375%, monthly compounding   Interest payable in Year 1:  $32,596   Interest payable in Year 2:  $32,014   Interest payable in Year 3:  $31,437   Interest payable in Year 4:  $30,836  Investor's marginal tax rate:  34%  Investor's capital gains tax rate:  20%  Recaptured depreciation tax rate:  35%  Required return on equity capital (after tax):  14%  Investment horizon:  4 years  Market value at the end of 4th year:  922,368  Costs of sale:  8% of sales price  Chavez has determined that Luxury Apartments will purchase one of several apartment complexes from a set that the firm has compiled. Howard tells Chavez that since the cash flow patterns for apartment complexes have only one sign change, the optimal project will be the apartment complex with the highest estimated IRR. In comparing various real estate investment options, how would the principal characteristics of apartments best be characterized? A)
 Passive, moderately liquid. 
 B)
 Moderately active, not very liquid. 
 C)
 Active, moderately liquid. 

Investing in an apartment complex would best be described as an active investment. Professional management may be required, although Chavez’s firm plans to manage the property themselves. (Study Session 13, LOS 44.a)
Does an investment in an apartment complex meet Chavez’s investment objectives?  B)
 No, apartments do not provide an inflation hedge. 
 C)
 No, apartments only provide returns from income. 

Apartments provide returns from income plus appreciation and provide an inflation hedge. Income comes from the collection of rent, while appreciation comes from increases in property value. Apartments provide inflation hedges because as leases expire during an inflationary period, extensions or new leases will be set at higher rates. (Study Session 13, LOS 44.a)
Given the various inputs provided, the projected income taxes payable on the Boat Club Luxury Apartments project in Year 3 is closest to:
Income taxes payable is computed by subtracting depreciation and interest from NOI to compute taxable income. Taxable income is then multiplied by the tax rate of 34% to compute income taxes payable. To compute NOI for year three, take the NOI given for year 1 and inflate it using the 3% growth rate for two years as follows:
NOIt−3 = NOIt−1(1+g)2 = 120,000 × 1.032 = 127,308
Taxable income is then:
taxable incomet−3 = NOIt−3 − depreciationt−3 − interestt−3 = 127,308 − 30,000 − 31,437 = 65,871
Income taxes payable is then:
income taxes payablet−3 = taxable incomet−3 × income tax rate = 65,871 × 0.34 = 22,396
For more clarification on the computation of income taxes payable, please refer to the table below.
Computation of Income Taxes Payable for Boat Club Luxury Apartments   Year 1  Year 2  Year 3  Year 4  NOI (growth rate = 3%)  $120,000  $123,600  $127,308  $131,127  Less: Depreciation  ($30,000)  ($30,000)  ($30,000)  ($30,000)  Less: Interest  ($32,596)  ($32,014)  ($31,437)  ($30,836)  Taxable income  $57,404  $61,586  $65,871  $70,291  × Income tax rate  0.34  0.34  0.34  0.34  Income taxes payable  $19,517  $20,939  $22,396  $23,899 
(Study Session 13, LOS 44.c)
Given loan terms as described above, the amount of monthly debt service is closest to:
Monthly debt service (i.e., the monthly loan payment) can be computed on the calculator using the TVM function. Remember with monthly compounding to adjust the number of periods and the interest rate for monthly compounding.
N: 360 (= 30 × 12)
PV: 750,000
I: 0.3646 (= 4.375 / 12)
PMT: CPT → 3,744.7339
(Study Session 13, LOS 44.c)
The projected cash flow after taxes (CFAT) for Year 2 is closest to:
The projected cash flow after taxes (CFAT) for Year 3 is $59,972. It is computed by taking the NOI, deducting the annual debt service and taxes payable.
CFATt−3 = NOI − debt service − taxes payable = 123,600 − 44,940 − 20,939 = 57,721
For more clarification on the computation of cash flow after taxes, please refer to the table below.
Cash Flow After Taxes (CFAT) Computation for Boat Club
Luxury Apartments   Year 1  Year 2  Year 3  Year 4  NOI  $120,000  $123,600  $127,308  $131,127  Less: Debt service  ($44,940)  ($44,940)  ($44,940)  ($44,940)  Pretax cash flow  $75,060  $78,660  $82,368  $86,187  Less: Taxes payable  ($19,517)  ($20,939)  ($22,396)  ($23,899)  CFAT  $55,543  $57,721  $59,972  $62,288 
(Study Session 13, LOS 44.c)
Is Howard’s statement regarding using the IRR method for selecting the optimal apartment complex CORRECT?  B)
 No, the IRR method may yield multiple IRRs. 
 C)
 No, the NPV method should be used. 

The NPV method should be used when selecting the value maximizing project from a mutually exclusive set (e.g., only one of a set of possible investments may be accepted) as the IRR method may not select the value maximizing project. In this case, there is no concern for IRR yielding multiple rates as there is only one change in sign for the project cash flows. (Study Session 13, LOS 44.d) 
