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a. Using the information on the Excel sheet provided, Please thoroughly explain the steps on how to determine the expected levered-before-tax-annual rate of return on your capital. b. please determine the portion of the return that is expected from the annual cashflows and the portion that is expected as a result of property price appreciation.

a. Using the information on the Excel sheet provided, Please thoroughly explain the steps on how to determine the expected levered-before-tax-annual rate of return on your capital. b. please determine the portion of the return that is expected from the annual cashflows and the portion that is expected as a result of property price appreciation.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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a. Using the information on the Excel sheet provided, Please thoroughly explain the steps on how to determine the expected levered-before-tax-annual rate of return on your capital.

b. please determine the portion of the return that is expected from the annual cashflows and the portion that is expected as a result of property price appreciation. 

Inputs: Acquisition Price Expected 1st Year NOI "Going in" CAP $2,890,000 Down Payment $149,991 Mortgage Rate 5.19% Maturity CAP over (below) market 0.50% Levered Required Return Required Rate of Return 8.50% Minimum Required DCR Expected NOI Growth 3.50% Expected Treasury Yield Terminal NOI Growth 2.90% Expected LT Inflation. Acquisition Price + Closing Costs $2,962,250 Expected Risk Premium (bp) End of year 0 1 2 3 4 5 6 7 8 Amortization schedule: Total I NOI 0 1 $100,717 2 $98,206 3 $95,524 4 $92,660 5 $89,601 6 7 8 19 20 $149,991 $155,241 $160,674 $166,298 $172,118 $178,142 $184,377 $190,830 9 $75,140 10 $70,890 11 $66,350 I $86,334 $82,845 $79,119 12 $61,503 $56,325 13 14 $50,796 15 $44,890 16 $38,583 17 $31,847 18 $24,653 $16,969 $8,764 $1,271,714 P P Acquisition/Disposition ($2,962,250) $3,195,084 Outputs: $1,481,125 Terminal CAP 6.80% Loan Amount 20 Mortgage Payment (Annual) 11.00% DCR 1.2 Mimimum DCR Satisfied? 4.30% Mortgage Balance at Sale 2.90% 400 CF ($2,962,250) $149,991 $155,241 $160,674 $166,298 $172,118 $178,142 $184,377 $3,385,915 Total PV: $2,606,659 NPV: -$355,591 IRR: 6.45% Ending balance $1,481,125 $36,925 $1,444,200 $39,436 $1,404,763 $42,118 $1,362,645 $44,982 $1,317,663 $48,041 $1,269,622 $51,308 $1,218,315 $54,797 $1,163,518 $58,523 $1,104,995 $62,502 $1,042,493 $66,752 $975,741 $71,292 $904,449 $76,139 $828,310 $81,317 $746,993 $86,846 $660,146 $567,394 $92,752 $99,059 $468,335 $105,795 $362,540 $112,989 $249,551 $120,672 $128,878 $128,878 $0 I + P $1,481,125 $2,752,839 PV of CF ($2,962,250) $138,241 $131,870 $125,793 $119,996 $114,466 $109,191 $104,160 $1,762,942 5.900% Closing Fees $1,481,125 Comission $137,642 Closing Costs $ 1.09 Selling Expense $ No $1,104,995 DS ($137,642) ($137,642) Levered CF $ (1,481,125) $12,349 $17,599 $23,032 $28,656 $34,476 $40,500 $46,735 ($137,642) ($137,642) ($137,642) ($137,642) ($137,642) ($1,242,637) $2,143,277 Total PV: $1,055,775 ($425,350) 6.17% NPV: IRR: 2.50% 4.00% 72,250 133,128 PV of Levered CF ($1,481,125) $11,125 $14,284 $16,841 $18,876 $20,460 $21,653 $22,510 $930,025 down payment max down payment max levered price max unlevered price Pv of NOI (year 8) Pv of NOI pv of sale R 51% $1,055,775 $2,070,146 $2,606,659 $99,360 $943,077 $1,663,583 943.077/2606659 1663583/2606659 36% 64%
Transcribed Image Text:Inputs: Acquisition Price Expected 1st Year NOI "Going in" CAP $2,890,000 Down Payment $149,991 Mortgage Rate 5.19% Maturity CAP over (below) market 0.50% Levered Required Return Required Rate of Return 8.50% Minimum Required DCR Expected NOI Growth 3.50% Expected Treasury Yield Terminal NOI Growth 2.90% Expected LT Inflation. Acquisition Price + Closing Costs $2,962,250 Expected Risk Premium (bp) End of year 0 1 2 3 4 5 6 7 8 Amortization schedule: Total I NOI 0 1 $100,717 2 $98,206 3 $95,524 4 $92,660 5 $89,601 6 7 8 19 20 $149,991 $155,241 $160,674 $166,298 $172,118 $178,142 $184,377 $190,830 9 $75,140 10 $70,890 11 $66,350 I $86,334 $82,845 $79,119 12 $61,503 $56,325 13 14 $50,796 15 $44,890 16 $38,583 17 $31,847 18 $24,653 $16,969 $8,764 $1,271,714 P P Acquisition/Disposition ($2,962,250) $3,195,084 Outputs: $1,481,125 Terminal CAP 6.80% Loan Amount 20 Mortgage Payment (Annual) 11.00% DCR 1.2 Mimimum DCR Satisfied? 4.30% Mortgage Balance at Sale 2.90% 400 CF ($2,962,250) $149,991 $155,241 $160,674 $166,298 $172,118 $178,142 $184,377 $3,385,915 Total PV: $2,606,659 NPV: -$355,591 IRR: 6.45% Ending balance $1,481,125 $36,925 $1,444,200 $39,436 $1,404,763 $42,118 $1,362,645 $44,982 $1,317,663 $48,041 $1,269,622 $51,308 $1,218,315 $54,797 $1,163,518 $58,523 $1,104,995 $62,502 $1,042,493 $66,752 $975,741 $71,292 $904,449 $76,139 $828,310 $81,317 $746,993 $86,846 $660,146 $567,394 $92,752 $99,059 $468,335 $105,795 $362,540 $112,989 $249,551 $120,672 $128,878 $128,878 $0 I + P $1,481,125 $2,752,839 PV of CF ($2,962,250) $138,241 $131,870 $125,793 $119,996 $114,466 $109,191 $104,160 $1,762,942 5.900% Closing Fees $1,481,125 Comission $137,642 Closing Costs $ 1.09 Selling Expense $ No $1,104,995 DS ($137,642) ($137,642) Levered CF $ (1,481,125) $12,349 $17,599 $23,032 $28,656 $34,476 $40,500 $46,735 ($137,642) ($137,642) ($137,642) ($137,642) ($137,642) ($1,242,637) $2,143,277 Total PV: $1,055,775 ($425,350) 6.17% NPV: IRR: 2.50% 4.00% 72,250 133,128 PV of Levered CF ($1,481,125) $11,125 $14,284 $16,841 $18,876 $20,460 $21,653 $22,510 $930,025 down payment max down payment max levered price max unlevered price Pv of NOI (year 8) Pv of NOI pv of sale R 51% $1,055,775 $2,070,146 $2,606,659 $99,360 $943,077 $1,663,583 943.077/2606659 1663583/2606659 36% 64%
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