2. You buy a hotel today for $15 Million. The capital stack is as follows: $5 Mi

Question

2. You buy a hotel today for $15 Million. The capital stack is as follows: $5 Milion is equity (cash out) and the remaining $10 Million is debt. You expect your NOI for year 3 to be $1,400,000.00. Assume the going Cap Rate for hotels in year 3 is 7%, what is the expected sale price of the hotel at end of year 3? The $10 Million dollar loan you secured, is a 30 year fully amortizing loan at 5% fixed. Given year 1 cash flow of S500,000.00, year 2 cash flow of $625,000.00, and year 3 cash flows of $750,000.00 and profit realized from the sale of the asset at the end of year 3, calculate the IRR for this project. 3. For the above problem, find the IRR assuming no debt is employed (the deal is all cash). Why is the IRR different from the above problem? Explain

Explanation / Answer

WeNOI ( Net operating income) for year 3=$ 1,400,000

B.

IRR=11%

Closing balance =$9525504.25

1. We have assumed repayment of loans in year 3

2. Formula for instalment =PMT(.05,30,10000000)

C.IRR for no debt situation is 67%

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