You have an opportunity to acquire a property from a bank. It’s offered for $200

Question

You have an opportunity to acquire a property from a bank. It’s offered for $200,000. You would have to spend: (1) $10,500 on various acquisition-related expenses, (2) An average of $2,000 per month during the next 12 months for repair costs, etc. You would be able to receive a loan: 90 percent loan-to-value ratio, 8% annual interest, for 12 months, payable monthly (interest-only loan). Your market research indicates that after you repair the property, it may sell for about $225,000 at the end of 1 year. In addition, you will probably have to pay about $3,000 in fees & selling expenses.

a. If you wanted to earn a 20% return, compounded monthly, do you believe that $200,000 would be a good investment? (Show and explain all necessary calculations.)

b. If not, what counter-offer would you have to make to the bank in order to achieve the 20% return? (Show and explain all necessary calculations.)

please show step by step calculations...

Explanation / Answer

1.

NPV=-200000*(1-90%)-10500+(225000-200000*90%-3000)/(1+20%/12)^12-(2000+200000*90%*8%/12)/(20%/12)*(1-1/(1+20%/12)^12)=-30600.94

Hence, it would not be a good investment

2.

Let counter offer be x

Hence, NPV should be zero

NPV=-x*(1-0.9)-10500+(225000-x*0.9-3000)/(1+20%/12)^12-(2000+x*90%*8%/12)/(20%/12)*(1-1/(1+20%/12)^12)

Hence, x=166106

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