Lesson10_Investment

Operating income noi debt service ds before tax equity

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Unformatted text preview: iscount rate of 20.2584%, NPV = 0, that is, PV = equity investment…by definition, this is the I RR! IRR Decision Rule: Invest if IRR > Opportunity Cost Dr. Eriksen Lesson 10: RE Investment 22 Levered Cash Flows From Centre Point Office Building Annual Year Total BTCF BTER Present Value CF At 16% 1 30,656 30,656 0.862069 26,428 2 33,329 33,329 0.743163 24,769 3 36,082 36,082 0.640658 23,116 4 38,918 38,918 0.552291 21,494 5 $41,838 $385,512 0.476113 183,547 $343,674 Total Present Value of Levered Inflows = $279,354 Required Investment Equity = - 241,162 Net Present Value of Investment = $38,192 23 Required Internal Rate of Return ( ye ) 12.00 % 14.00 16.00 18.00 20.00 20.2584 22.00 24.00 Net Present Value $ 81,943 58,993 38,191 19,298 2,106 0 (13,565) (27,878) Exhibit 20-10 The Effects of Debt Financing on Centre Point Cash Flows, IRRs, and Risk 24 Initial loan amount Initial loan-to-value ratio NOI in year 1 - Annual debt service = BTCF Initial equity* BTCF/initial equity Growth rate in PGI: -1% (5% probability) +1% (20% probability) +3% (50% probability) +5% (20% probability) +8% (5% probability) Mean IRR Standard deviation of IRR Mean Return/Std. Dev. $0 0% $ 89,100 — $ 89,100 $885,000 10.1% IRR 8.0% 10.1 12.2 14.2 17.4 7.6% 4.3 1.8 $442,500 50% $89,100 $38,963 $ 50,137 $455,775 11.0% IRR 7.3% 11.4 15.2 18.8 23.9 9.5% 5.9 1.6 $663,750 75% $89,100 $58,444 $30,656 $241,163 12.7% IRR 5.9% 13.7 20.3 26.0 33.5 12.6% 8.5 1.5 $796,500 90% $89,100 $70,133 $18,967 $112,395 16.9% IRR 1.4% 19.2 30.7 39.7 50.6 18.6% 13.6 1.4 *The initial equity is equal to the total purchase price minus the net loan proceeds. The net loan proceeds equal the face amount of the loan minus up-front financing costs equal to 3 percent of the loan amount. 8 Real Estate Fundamentals Texas Tech University Effect of Leverage on Return to Equity You are about to purchase a $10m Hotel that you anticipate will earn an NOI of $900k per year. You further anticipate you will receive $12m in NSP when you sell the property at the end of 5 years. You have a risk adjusted annual discount rate of 10%. What is N...
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