SS13 - Real Estate Valuation question, capital, mortgage, knowledge, following

IAmNeil

Try the following question to test your knowledge. I will post the answers later.

1. NOI is 64,000
2. Price is 525,000
3. Improvements make up 85.9% of the price. Using a 27.5-year life, SLD gives 16,399 annual tax depreciation.
4. Equity cont.: 131,250
5. Debt cont.: 30-year 8% fixed rate mortgage for 393,750. Monthly payment: 2,889.20. LTV ratio: 75%
6. 36% marginal income tax; 20% capital gains tax; 25% recaptured depreciation tax.
7. Required after-tax return: 12%
8. Holding period: 4 years. NOI expected to grow over holding period 5% annually. Market value at end of year 4 is 777,924. Selling costs are 7% of sales price (market value). Outstanding loan balance at end of year 4 is 378,862.
9. Annual compounding used for the equity TVM calculations.

A. Determine taxes payable (years 1 through 4)
B. Determine after-tax cash flow (years 1 through 4)
C. Determine after-tax equity reversion (end of year 4)
D. Calculate NPV of the investment (12%)
E. Calculate IRR of the investment
F. Explain using the NPV and IRR rules why an investor would or would not invest in this real estate venture.