1) As you prepare to pursue your two-year Master’s Degree in Real Estate Finance at a prestigious out-of-state university, you start to look at your housing options.
You find a condo which you can purchase today for $460,000 and for which you think you’ll receive $515,000 (after all expenses) when you sell it at the end of two years. Assume there are no annual upkeep expenses associated with this condo.
Assume you can invest your money at 8.25% interest.
1(a). What is the Net Present Value of this investment to you? Show your work.
1(b). You find a comparable apartment you can rent for $15,000 per year for two years. What is the Present Value of this two-year contract to you? Show your work.
1(c). Which option (the condo or the apartment) is the better choice for you? Explain with reference to the cost in present terms.
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2. A water conservation company offers to equip your 50-unit apartment building with the latest in water saving devices for a one-time cost of $27,000 (materials and labor). Assume that whatever annual savings you receive on your water bill will go on in perpetuity and that you could otherwise invest your money at 8.00% per year.
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2(a). According to the provider’s projections, you’ll save approximately $1,500 per year on your water bill. Should you undertake the investment? Explain with reference to the NPV Rule and show your work
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2(b). Continuing with the assumptions in Q2(a), what is the Internal Rate of Return on this investment?
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2(c). Keeping in mind that you can invest your money at 8.00% per year, what is the absolute minimum amount of annual savings you would need to receive in order to make this investment exactly break even (i.e. have a Net Present Value of exactly zero)? Show your work
3. You’re trying to obtain financing for a Restaurant you’re purchasing. The lender has agreed to originate a loan which carries a 7.00% interest rate, a 30-year amortization, and calls for annual (not monthly) payments. Your lender hasn’t mentioned their constraints regarding Debt Service Coverage Ratio, Loan-to-Value, or Loan-to-Cost.
The net operating income for the property is $1.9 million per year.
3(a). What is the Loan Constant for this proposed loan? Round four digits to the right of the decimal (i.e $0.1234). Show the Excel formula you used.
Note: You may want to take 30 seconds to view this tutorial on working with decimal places in Excel:
3(b). What Debt Service Coverage Ratio are you implicitly offering the lender for your proposed $15.4 million loan? Show your work.
3(c). Your lender informs you that they’re willing to accept a Debt Service Coverage Ratio as low as 1.40 (but no lower). Under this constraint what is the maximum loan size? Show your work
You’ve saved up $1 million in cash and are ready to deploy it in the booming Car Wash market in your hometown.
4. You obtain the right to purchase a drive-through coffee shop at a busy intersection. Your due diligence results in the following analysis:
4(a). Assuming you pursue this project using 100% cash, what is the Net Present Value and Internal Rate of Return? Show your work with the help of a table.
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4(b). One lender offers you a loan for $2.4 million to purchase this property. The loan carries an interest rate of 6.75% and an annual (not monthly) payments of $222,160.
Calculate the leveraged Internal Rate of Return for this project as well as the Net Present Value of the leveraged project. Show all of your work with the use of appropriate tables. Hint: Capturing all of the information required may require in excess of eight rows of information (not including spacer rows).
4(c). The loan in Q4(b) above falls through and you end up with a $2.2 million loan which requires annual payments of $175,000. When the sale occurs at the end of the third year, the outstanding loan balance will be $2,115,000.
What will the Leveraged Cash Flows from the project be under these new terms? Show with the help of a table
Q5(a). Your first prospect is Ricardo’s Car Wash (located over on Distant Street) which can be purchased for exactly $1 million. The annual net operating income from the project is $130,000.
What Return on Assets does Ricardo’s Car Wash produce? Show your work
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Q5(b). If you decided to purchase Ricardo’s Car Wash using only your own money, what would your return on entrepreneurial equity be in Year 1? Show your
Q5(c) Scouring the market further, you find Jeff’s Car Wash (located on Side Street) which is for sale for exactly $2 million and produces $260,000 of annual net operating income.
What Return on Assets does Jeff’s Car Wash produce? Show your work
Q5(d). After talking to a lender, you find they’re willing to lend up to 50% loan-to-value on Car Wash projects. The loans are interest-only and carry a 5.5% interest rate.
If you decided to purchase Jeff’s Car Wash using all $1 million of your own entrepreneurial equity and a $1 million (50% LTV) bank loan, what would your return on entrepreneurial equity be in Year 1? Show your work (a table may be helpful to you).
Keyboard ShortcutsQ5(e). Going back to the market, you find Annie’s Car Wash (located on Main Street) which is for sale for $4 million and produces $520,000 of annual net operating income.
5e What Return on Assets does Annie’s Car Wash produce? Show your work.
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Q5(f). You find an investor who is willing to provide up to $1 million in investor equity on which they require a simple 10% return on equity per year.
If you decided to purchase Annie’s Car Wash using a $2 million bank loan (50% LTV), $1 million of investor equity, and all $1 million of your Entrepreneurial Equity would your return on entrepreneurial equity be in Year 1? Show your work (a table may be helpful to you).