You are considering the purchase of an industrial building for $10,450,000 today. Below, you are given the information you need to analyze the investment and decide how to proceed. Your expectations for this stabilized property include the following: first-year potential gross income of $2,050,000; vacancy and collection losses equal to 4% of potential gross income; operating expenses equal to 30% of effective gross income; and capital expenditures equal to 6% of EGI. You have arranged a mortgage loan with 60% LTV and an annual interest rate of 2.5%. The loan will be amortized over 15 years. Calculate the following for comparison to other similar properties: (a) Capitalization rate? (b) Effective gross income multiplier? 7 (c) Operating expense ratio?

You are considering the purchase of an industrial building for $10,450,000 today. Below, you are given the information you need to analyze the investment and decide how to proceed. Your expectations for this stabilized property include the following: first-year potential gross income of $2,050,000; vacancy and collection losses equal to 4% of potential gross income; operating expenses equal to 30% of effective gross income; and capital expenditures equal to 6% of EGI. You have arranged a mortgage loan with 60% LTV and an annual interest rate of 2.5%. The loan will be amortized over 15 years. Calculate the following for comparison to other similar properties: (a) Capitalization rate? (b) Effective gross income multiplier? 7 (c) Operating expense ratio?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

Determine the average rate of return for a project that is estimated to yield total income of $220,800 over 4 years, cost $419,000, and has a $41,000 residual value.
Zenith Investment Company is considering the purchase of an office property. It has done an extensive market analysis and has estimated that based on current market supply or demand relationships, rents, and its estimate of operating expenses, annual NOI will be as follows: Year NOI 1 $ 1,030,000 2 1,030,000 3 1,030,000 4 1,210,000 5 1,260,000 6 1,310,000 7 1,349,000 8 1,389,170 A market that is currently oversupplied is expected to result in cash flows remaining flat for the next three years at $1,030,000. During years 4, 5, and 6, market rents are expected to be higher. It is further expected that beginning in year 7 and every year thereafter, NOI will tend to reflect a stable, balanced market and should grow at 3 percent per year indefinitely. Zenith believes that investors should earn a 12 percent return (r) on an investment of this kind.Required: a. Assuming that the investment is expected to produce NOI in years 1 to 8 and is expected to be owned for…
You are an investor buying an existing office building. You determine that year 1 NOI will be $44,000 and that you the going in CAP rate is 4.1%. Using the Direct Capitalization approach, what is the estimated value of the building? You also determine that the Effective Gross Income will be $80,000 and the Effective Gross Income Multiplier is 13. What is the value using the EGIM muliplier approach? You also determine that the Annual Debt Service is 35,000. What is the Debt Service Coverage Ratio?
Determine the average rate of return for a project that is estimated to yield total income of $484,440 over 4 years, costs $668,000, and has a $66,000 residual value.
The initial investment in machinery would be $8 million immediately and the project is expected to last for three years. Investment in machinery receives tax allowable depreciation of 25% per annum on a straight-line basis. Allowances are receivable one year in arrears. The machinery will be sold at the end of the project for $5 million, in year 3 prices. And the answer is in the picture. How to calculate the answer of Tax Allowable depreciation?
Consider how Kyler Valley River Park Lodge could use capital budgeting to decide whether the $12,000,000 River Park Lodge expansion would be a good investment. Assume Kyler Valley's managers developed the following estimates concerning the expansion: (Click the icon to view the estimates.) Assume that Kyler Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $850,000 at the end of its ten-year life. The average annual operating income from the expansion is $1,773,400 and the depreciation has been calculated as $1,115,000. Calculate the ARR. Round to two decimal places ARR Data Table 120 skiers Number of additional skiers per day Average number of days per year that weather conditions allow skiing at Kyler Valley 145 days Useful life of expansion (in years) 10 years 244 Average cash spent by each skier per day 78 Average variable cost of serving each skier per day 12,000,000 Cost of expansion 8% Discount rate
You are to consider the following projects. Which project would you approve if each project creates the same income? Assume i = 8% and a period of 15 years.
A project requires initial asset investment of $1 million. The asset will last for 8 years, and will be depreciated for tax purposes at the CCA rate of 30%. The required return on this project is 16%, and the marginal corporate tax rate is 36%. Assuming that the asset will have a salvage value of $50,000 at the end of Year 8. what is the present value of the CCA tax shields from this project? Multiple Choice 204111.57 $215.009.97 $218.59071 $234.782.61
DuraTech Manufacturing is evaluating a process improvement project. The estimated receipts and disbursements associated with the project are shown below. MARR is 6%/year. Solve, a.What is the future worth of this investment?b. What is the decision rule for judging the attractiveness of investments based on future worth? c. Should DuraTech implement the proposed process improvement?
Determine the average rate of return for a project that is estimated to yield total income of $46,500 over 3 years, has a cost of $95,000, and has a $5,000 residual value.
Sky High Partners is evaluating a high-rise office building to add to its investment portfolio. To calculate a value, Sky High plans to use the income approach, based on the following estimates: Gross potential yearly rental income Estimated vacancy rate Yearly operating costs Market capitalization rate a. Compute the net operating income (NOI) for the building. Net operating income $ Valuation $ 890,000 2.75% $ 417,000 14% 448,525 b. Using the income approach, calculate the value for the office building. Note: Round your answer to the nearest whole number.
Determine the average rate of return for a project that is estimated to yield total income of $600,000 over 4 years, costs $840,000, and has an $80,000 residual value. Round your answer to one decimal place.

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