E) Let’s suppose that you expect to lose a tenant in year 3, which lowers the NO
ID: 2657819 • Letter: E
Question
E) Let’s suppose that you expect to lose a tenant in year 3, which lowers the NOI in years 3, 4 and 5 by $80,000 in each year. What is the new IRR for both scenarios?
F) Explain, in a few sentences, the outcome of E).
G) What would happen to the Going-Out Cap Rate in this situation? Does it stay the same, does it go up, or down? Explain.
nario with a Mortgage: Year 3 NOI: 4 DS: 5 After Tax Cash Flows: $200,000.00 $240,000.00 $245,000.00 $250,000.00$260,000.00 125,000.00 $125,000.00 $125,000.00 $125,000.00 $125,000.00 1,400,000.00After Tax Equity Reversion: Profit tor the Equity Investor 7 Total Cash Flows: 8 $1,250,000.00 $75,000.00 $115,000.00 $120,000.00 $125,000.00 1,535,000.00 10.83% 10 12 Scenario without a Mortgage: Year: IS NOI: b DS: $200,000.00 $240,000.00 $245,000.00 $250,000.00 $260,000.00 $0.00 $0.00 $0.00 50.00 S0.00 After Tax Cash Flows: 2,900,000.00Atter Tax Equity Reversion: Protit tor the Equity Investor Total Cash Flows: $2,800,000.00 $200,000.00 $240,000.00 $245,000.00 $250,000.00 $3,160,000.00 20 IRR 9.05% 23 24Explanation / Answer
E) IRR in Scenario 1 turns negative to -7.34% Excel Formula =IRR(cashflows in table above)
IRR in Scenario 2 is 1.35%
F) the total net operating income has reduced by 80,000 and as a result the total cashflows have also reduced and also the terminal perpetuity cash flow has reduced , this has led to reduction in IRR in both the cases even negative in case 2
G) The going out cap rate does not changes because it is dependent on the comparable transactions of similar properties and attributes, location of the property
Scenario with mortagage Year 0 1 2 3 4 5 NOI 210000 240000 160000 170000 180000 DS 125000 125000 125000 125000 125000 After Tax Cash Flow 85000 115000 35000 45000 55000 572916.7 =After tax equity reversion: profit for the equity investor Total Cash Flows -1250000 85000 115000 35000 45000 627916.7 IRR -7.34% Cap Rate 9.6% (Year 5 cash flow/After tax equity reservation) Scenario without Mortagage Year 0 1 2 3 4 5 NOI 210000 240000 160000 170000 180000.0 DS 0 0 0 0 0 After Tax Cash Flow 210000 240000 160000 170000 180000 2006689.0 =After tax equity reversion: profit for the equity investor Total Cash Flows -2800000 210000 240000 160000 170000 2186689.0 IRR 1.35% Cap rate 9% (Year 5 cash flow/After tax equity reservation)Related Questions
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