12. An office building is purchased with the following projected cash flows: • N

Question

12.  An office building is purchased with the following projected cash flows:

•  NOI is expected to be $130,000 in year 1 with 5 percent annual increases.

•  The purchase price of the property is $720,000.

•  100 percent equity financing is used to purchase the property.

•  The property is sold at the end of year 4 for $860,000 with selling costs of 4 percent.

•  The required unlevered rate of return is 14 percent.

a.  Calculate the unlevered internal rate of return (IRR).

b.  Calculate the unlevered net present value (NPV).

Explanation / Answer

IRR:

0=-720000+130000/(1+IRR)+130000*(1+5%)/(1+IRR)^2+130000*(1+5%)^2/(1+IRR)^3+130000*(1+5%)^3/(1+IRR)^4+860000*(1-4%)/(1+IRR)^4

IRR=21.8832%

NPV:

NPV @ 14%

=-720000+130000/(1+14%)+130000*(1+5%)/(1+14%)^2+130000*(1+5%)^2/(1+14%)^3+130000*(1+5%)^3/(1+14%)^4+860000*(1-4%)/(1+14%)^4

=173732.076

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