Question

if an investor has found a possible investments

1. If an investor has found a possible investment property with the net income after all operating expenses but before capital recapture from a small apartment house is estimated to be 5480 year: How much would an investor be willing to pay for the property if first mortgages are availa 75% the purchase price at 5.5% interest and the investor's equity capital investment requires return. The remaining life of the buildings is 50 years. Use the income approach to estimate the value of this property. a. What is the investor's weighted average cost of capital for the purchase of this investment property? b. What is the capitalization rate adjusted for recapture for this investor? C. What is the estimated value of this property using the income capitalization approach? d. What is the maximum price this investor can pay for this property and earn his or her required rate of return on investment capital?

Answer 1

Supporting Calculations
Net Income from the Property / Year	$        48,000
Return % Expected	15%
Value of the Property	$      320,000
(Net income / Return %)
Mode of Funding
Debt Amount 75%	$      240,000
Equity Amount 25%	$        80,000
Interest on Debt	5.50%
Income Tax Rate	0%
Answer to Question a
Formula for Weighted Average Costs of Capital (WACC)
(Equity/(Equity+Debt))*return/cost on Equity + (Debt/(Equity+Debt))*return on debt*(1-Income Tax rate)
WACC is	7.88%
Answer to Question b
Capitalisation rate is	Net Income / Value of Property
Capitalisation rate is	15%
Answer to Question c
In Income capitalisation approach net Income is divided by the expected return or capitalisation rate
Estimated value is	$      320,000
Answer to Question d
Net Income	$        48,000
Interest on debt	$      (13,200)
Net Income	$       34,800
Estimated value of property ready to be paid	$      232,000