Exam 19: Investment Decisions: NPV and IRR

A client has requested advice on a potential investment opportunity involving an income producing property.She would like you to determine the internal rate of return of the Investment opportunity based on the following information.Expected Holding Period: 5 years;End of first year NOI estimate: $113,900;NOI estimates in subsequent years will grow by 5% per year;Price at which the property is expected to be sold at the end of year 5: $1,615,205.22;Current market price of the property: $1,475,667.71.

The use of financial leverage in purchasing an income-producing property can affect the amount of cash required at acquisition,the net cash flows from rental operations,the net cash flows from the eventual sale of the property,and the ultimate return on invested equity.Assuming the going-in IRR is greater than the effective borrowing cost,if an investor increases his leverage rate,say from 75% to 80%,we would expect which of the following to occur?

Net present value (NPV)is interpreted using the following decision rule: The investor will purchase the property as long as the NPV is:

In discounted cash flow analysis,the industry standard for pro forma cash flow projections of investment properties is typically:

Given the following expected cash flow stream,determine the NPV of the proposed investment in an income producing property and determine whether or not the investment should be pursued.Investment Horizon: 5 years;Expected Yearly Cash Flow in each of the next five years: $127,628.Expected Sale Price at end of 5 years: $1,595,350;Opportunity Cost of Investment 6%;Current Market Price of Property: $1,750,000

Given the following information regarding an income producing property,determine the internal rate of return (IRR)using levered cash flows.Expected Holding Period: 5 years;1^st year Expected NOI: $89,100;2^nd year Expected NOI: $91,773;3^rd year Expected NOI: $94,526;4^th year Expected NOI: $97,362;5^th year Expected NOI: $100,283;Debt Service in each of the next five years: $58,444;Current Market Value: $885,000;Required equity investment: $221,250;Net Sale Proceeds of Property at end of year 5: $974,700;Remaining Mortgage Balance at end of year 5: $631,026.

To overcome the potential shortcomings of single-year decision making metrics,many investors in real estate also perform multiyear discounted cash flow (DCF)valuation.DCF valuation differs from the single-year ratio analysis in all of the following ways EXCEPT: