Exam 9: Measuring Investment Performance: The Concept of Returns

Consider a 20-year (monthly-payment), 8%, $80,000 mortgage with 2 points prepaid interest up front. What is the "effective interest rate" or yield over the borrower's expected holding period if the borrower expects to hold the loan for 12 years?

Suppose the lease on a certain space will expire at the beginning of 2008. You believe that the probability of the existing tenant renewing is 50 percent. If he renews, you will need to spend only an estimated $5.00/SF to upgrade his space. If he does not renew, it will take $25.00/SF to modernize the space, even then you expect 6 months of vacancy. What expected cash flow forecast should you put in year 2008 of your pro-forma for this space, if you expect triple-net market rents on new leases in 2008 to be $20/SF?

You are trying to apply a multi-year DCF analysis to evaluate an investment property with some long-term leases in it. You observe that other properties with similar lease structure and risk have been selling at cap rates around 11% (based on NOI with no capital reserve). You believe these other properties typically face capital expenditures on the order of 1% of property value per year in the long run, and that given such expenditures their net cash flows and values would reasonably be expected to grow in the long run at about 3% per year. What discount rate should you apply to your subject property in your DCF valuation?

After-tax cash flow will exceed before-tax cash flow whenever: