6.In this model, we’re assuming thatthe “Net Change in Cash” (the 4thline item in Exhibit 3.4.2) simply accrues to the equity investors and boosts their IRR by allowing them to earn back some of the invested funds prior to the exit. All debt is repaid only in the final year when we sell the property. If we used the cash flow generated in these years to REPAY the debt early instead, how would the IRR change? a.Just as in an LBO model, it’s always better to repay debt earlier if you can do so –doing so will generally INCREASE the IRR. b.You can’t even make a guess for how this will impact the IRR since it depends on the terms of the debt, the purchase price, and the selling price. c.This change would not impact the IRR by much since you’re still paying off the same amount of debt –you’re just doing it earlier on in the model now. d.In THIS case, the IRR will generally DECREASE if we use excess cash flow to repay debt because we sell the property only in Year 10, and the time-value of money means that repaying all the debt at the end makes less of an impact. 7.In addition to the purchase price, Exit Cap Rate, and Loan-to-Cost (LTC) ratio, which of the following metrics listed below would be useful to analyze in a sensitivity table for the IRR of a hotel acquisition and renovation? 8.For this question and the next 2 questions after this one, please consider the screenshot
shown below in Exhibit 3.8, of a real estate debt amortization schedule:
Exhibit 3.8 –Debt Amortization Schedule
Suppose that you change the assumptions and create an Interest-Only Period in the beginning –for example, you might set cell D10 to 15 or 20 rather than 0. Will this INCREASE or DECREASE the IRR for this hotel renovation?
If you look at the schedule, you’ll see that the interest + principal repayment total in each year is the same, but Excel allocates a higher percentage of the total to interest in the earlier years, via the IPMT and PPMT functions. Why might it do this?