Question

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 $1,250,000; rents are estimated at $160,000 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 8 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? 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 14 percent discount rate? e. what is the profitability index using a 14 percent discount rate?

Answer 1

In this assignment, you are asked to perform an investment analysis of a retail property for sale to a potential investor. This involves calculating the debt coverage ratio, capitalization rate, before-tax internal rate of return, net present value, and profitability index.

Step-by-step explanation:

The first-year debt coverage ratio can be calculated by dividing the Net Operating Income (NOI) by the Total Debt Service. In this case, the NOI is the effective gross income minus the operating expenses and the vacancy and collection loss. The Total Debt Service is the annual mortgage payment. The formula is: Debt Coverage Ratio = (Effective Gross Income - Operating Expenses - Vacancy and Collection Loss) / Total Debt Service. To calculate the terminal capitalization rate, you need to determine the expected net operating income at the time of sale and divide it by the expected selling price. The formula is: Terminal Capitalization Rate = Net Operating Income / Expected Selling Price. The investor's before-tax internal rate of return on equity invested can be calculated using the internal rate of return (IRR) formula. NPV can be calculated by finding the present value of the expected cash flows and subtracting the initial investment. Profitability index is calculated by dividing the present value of the cash inflows by the initial investment.