Question

Suppose that you are considering purchasing an investment property for $30 million. The property is expected to have a year 1 net operating income of $1.8 million. You expect to finance the purchase of the property with a 30-year loan for 60% of the purchase price. If the annual interest rate on the loan is 5% with monthly payments and monthly compounding, what will the year 1 before-tax cash flow be for the property

Answer 1

b. $640,465.32

Step-by-step explanation:

Options include "$1,800,000, $640,465, ($132,558), $614,846, $704,512"

I/Y = 0.42% [5%/12]

N = 360 [12*30]

PV = -$18,000,000 [-30000000*60%]

FV = $0

So, we calculate the PMT using financial calculator

Monthly payment (CPT) = PMT(I/Y. N, PV, FV)

Monthly payment (CPT) = PMT(0.42%. 360, 18000000, 0)

Monthly payment (CPT) = $96,627.89

Before-tax cash flow = Expected year 1 net operating income - 12*PMT

Before-tax cash flow = $1,800,000 - 12*$96,627.89

Before-tax cash flow = $1,800,000 - $1,159,534.68

Before-tax cash flow = $640,465.32