Question

An investor is planning to purchase a new apartment property for $1.5 million. He can obtain an 80% loan for 30 years at 10%. NOI is expected to be $500,000 in the first year and grow at a rate of 2% for the next three years along with the underlying value of the building. The building and improvements represent 80% of value and are depreciated over a 27.5 useful life for an annual depreciation allowance of $43,636. The project is expected to sell after three years, and the investors are subject to a 30% tax rate. Create pro forma cash flow statements to solve the following problems.

a.Find the BTIRR and ATIRR.

b. Find the unlevered BTIRR and ATIRR

c.Computer the Break-even interest rate (BEIR).

Answer 1

STEP 1
Value of Property	V	1500000
Growth rate	g	2%
Value of Property after 3 years	Vxg	1591812
Step 2
Interest per annum
Value of Property	V	1500000
Proportion of Loan	P	0.8
Interest Rate	i	0.1
Interest per annum	VxPxi	120000
Step 3	Tax Rate	30%
Year	NOI	Value of Property	Interest	Depreciation	Net Cash Flow before Tax	Tax	After Tax Cash Flow
0					-1500000		-1500000
1	500000	1500000	120000	43636	336364	100909.2	235454.8
2	515000		120000	43636	351364	105409.2	245954.8
3	530450	1591812	120000	43636	1958626	587587.8	1371038.2
BTIRR	25%	Using IRR Function in Excel
ATIRR	8%	Using IRR Function in Excel
Step 4	Tax Rate	30%
Year	NOI	Value of Property	Interest	Depreciation	Net Cash Flow before Tax	Tax	After Tax Cash Flow
0					-1500000		-1500000
1	500000	1500000	0	43636	456364	136909.2	319454.8
2	515000		0	43636	471364	141409.2	329954.8
3	530450	1591812	0	43636	2078626	623587.8	1455038.2
BTIRR Unlevered	33%	Using IRR Function in Excel
ATIRR Unlevered	14%	Using IRR Function in Excel
Break-even interest rate (BEIR).		33%	Highest