1. You are advising a group of investors who are considering the purchase of a s
ID: 1175507 • Letter: 1
Question
1. You are advising a group of investors who are considering the purchase of a shopping center complex. They would like to finance 75% of the purchase price. A loan has been offered to them with the following terms: The contract interest rate is 10% and will be amortized with monthly payments over 25 years. The loan has a lockout provision that prevents it from being repaid before year 5. The property is expected to cost $5 million. NOI is estimated to be $475,000, including overages for the first year and to increase at the rate of 3% annually for the next 5 years. The property is expected to be worth $6 million at the end of 5 years. The improvement represents 80% of cost, and depreciation will be over 39 years. Assume a 28% tax bracket for both income and capital gains tax and a holding period of 5 years. a. Compute the BTIRR and ATIRR on the equity investment. b. What is the BEIR? c. Is there positive financial leverage?
Explanation / Answer
Soln : Step 1: Please calculate the amortized schedule for 5 years using 25 years = 300 months of payment on monthly basis for amount = 75%*5 mn = 3.75 million for 10% interest = 10/12 = 0.83% on monthly basis.
Using PMT formula in excel we get EMI = 33970.59, please refer table for interest calculation:
Steo 2: We will drw the P& L statement of the project :
To calculate BTIRR for equity we have cash flows :
Using IRR in excel we get BTIRR = 6.20%
Similarly for ATIRR cash flows are :
We will get ATIRR = -0.48%
b) BEIR or Break even interest rates are where theinterest on borrowed funds has no effect on the return of invested fund, can be calculated sing this = After tax IRR on equity/(1-investor tax rate) = -0.48%/(1-0.28) = -0.67%
c ) As we have seen the BEIR is negative, hence, it is actually a negative leverage and not positive.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 3750000 37,47,279 37,44,536 37,41,770 37,38,981 37,36,168 37,33,333 37,30,473 37,27,590 37,24,682 37,21,751 37,18,795 37,15,814 37,12,809 37,09,778 37,06,722 37,03,641 37,00,534 36,97,401 36,94,243 36,91,057 36,87,846 36,84,607 36,81,341 36,78,049 36,74,728 36,71,381 36,68,005 36,64,601 36,61,169 36,57,708 36,54,218 36,50,699 36,47,151 36,43,574 36,39,966 36,36,329 36,32,661 36,28,962 36,25,233 36,21,473 36,17,681 36,13,858 36,10,003 36,06,116 36,02,196 35,98,244 35,94,258 35,90,240 35,86,188 35,82,102 35,77,983 35,73,828 35,69,640 35,65,416 35,61,157 35,56,863 35,52,533 35,48,167 35,43,764 35,39,325 Payment ? 33,970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 33970.59 Interest 31,250 31,227 31,204 31,181 31,158 31,135 31,111 31,087 31,063 31,039 31,015 30,990 30,965 30,940 30,915 30,889 30,864 30,838 30,812 30,785 30,759 30,732 30,705 30,678 30,650 30,623 30,595 30,567 30,538 30,510 30,481 30,452 30,422 30,393 30,363 30,333 30,303 30,272 30,241 30,210 30,179 30,147 30,115 30,083 30,051 30,018 29,985 29,952 29,919 29,885 29,851 29,817 29,782 29,747 29,712 29,676 29,641 29,604 29,568 29,531 Principal paid 2,721 2,743 2,766 2,789 2,812 2,836 2,859 2,883 2,907 2,932 2,956 2,981 3,005 3,031 3,056 3,081 3,107 3,133 3,159 3,185 3,212 3,239 3,266 3,293 3,320 3,348 3,376 3,404 3,432 3,461 3,490 3,519 3,548 3,578 3,607 3,638 3,668 3,698 3,729 3,760 3,792 3,823 3,855 3,887 3,920 3,952 3,985 4,018 4,052 4,086 4,120 4,154 4,189 4,224 4,259 4,294 4,330 4,366 4,403 4,439Related Questions
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