Required: a. Assume that if Rambo does the renovation, he will be able to obtain a new loan that is equal to the balance of the existing loan plus 75 percent of the renovation costs. What is the incremental return (ATIRRe) for doing the renovation versus not doing the renovation? Assume a five-year holding period.
Richard Rambo presently owns the Marine Tower office building, which is 20 years old, and is considering renovating it. He purchased the property two years ago for $800,000 and financed it with a 20-year, 75 percent loan at 4.5 percent interest (monthly payments). Of the $800,000, the appraiser indicated that the land was worth $200,000 and the building $600,000. Rambo has been using straight-line
Required:
a. Assume that if Rambo does the renovation, he will be able to obtain a new loan that is equal to the balance of the existing loan plus 75 percent of the renovation costs. What is the incremental return (ATIRRe) for doing the renovation versus not doing the renovation? Assume a five-year holding period.
b. Repeat (a) but assume that Rambo is able to obtain a new loan that is equal to 75 percent of the sum of the existing value of the property ($820,000) plus the renovation costs ($200,000). (This assumes that after renovation the value of the property will at least increase by the cost of the renovation.)
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