EXAMPLE ON GENERATING CASH FLOWS, EQUITY REVERSION AND NPV IRR ANALYSIS GIVEN Pu
ID: 2789804 • Letter: E
Question
EXAMPLE ON GENERATING CASH FLOWS, EQUITY REVERSION AND NPV IRR ANALYSIS GIVEN Purchase Price Land Value 30 yr.fixed rate loan @8% Loan to Value ratio 1st yr. Potential Gross Income Average VCL 1 st yr. Other Income 1st yr. Operating Expenses Yearly NOl increase Yearly OE increase Ordinary income tax rate Tax on Recaptd. Deprectn. Tax on Capital Gain Required Rate of Return Selling costs Capitalization Rate $525,000 $74,000 $393.750 75% $108,000 4% $39,68o 5% 58 36% 25% 20% 12% 10% Assumptions: . No Half Month (depreciation) Convention used for 1st year 2. Overall CapRate available from comparable properties to determine the sales price is REQUIRED: A. Construct detailed cash flows for the years 1 to 4, showing the BTCF and ATCF for each year B. Based on the available CapRate from comparable properties and the projected NOI for the 5th year, calculate the BTER and ATER, if this property were to be sold at the end of 4th year C. Based on your initial equity, projected cash flows and equity reversion, perform a Net Present Value analysis and calculate the Internal rate of Retun for this property. Based on your NPV and IRR findings, is this a good investment?Explanation / Answer
Computation of gross potential income:
Given,first year gross potential income=$108000
It is also given that there is a 5% increase in gross potential income each year
Therefore Gross potential income for 2nd year=108000+5%=$113400
Similarly add 5% increase for each year.
Computatikn Of VCL:
VCL rate is given in the question to be 4%
Therefore VCL for each year shall be calculated by multiplying VCL%(4%) with gross potential income for respective years
Example:VCL for first year=108000×4%=$4320
Computation of effective gross income:
Effective gross income is arrived at by deducting VCL from gross potential income
Example-Effective gross potential income for first year=Gross potential income less VCL=108000-4320=$103680
Computation of other income:
It is given in the question that there is no other income in the Year 1.Therefore it is assumed that there is no other income in the respective years as well
Computation of Total effective income:
As there is no other income effective gross income will be the total effective income.
Computation of Total Expenses:
The total operating expenses for year1 is given in the question-$39680.It is also given that there is a 5% increase in operating expenses.
Therefore the total operatimg expenses shall be calculated accordingly by shwoing 5% increase
Example opearting expenses for year 2-39680+5%=41664
As there is no information related to variable and fixed cost proportion in total operating expenses given in the question,the operating expenses cannot be segregated in to variable and fixed components.
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