Investment Valuation MMP 742

Tasks

Using the following assumptions, determine if the property purchase is a sound investment decision.

Assumptions

Purchase Price: $630,000

Holding Period: 5 years

Loan to Value Ratio: 80%

Loan Term: 20 years

Interest Rate: Commonwealth Bank 5-year Principal and Interest Fixed Rate Loan

Acquisition and Financing Costs: Find using the Commonwealth Bank Upfront Cost Calculator

Vacancy and Collection: 5% of Gross Rent

Per Month Rent: Use a Gross Rental Yield of 3.2% to calculate Gross Rent in year 1

Rental Growth (annual): 3%

Annual Operating Expense (AOE): 20% of annual Gross Rent

AOE Growth: 2%

Depreciation Method: Straight Line

Value of Depreciable Assets: $45,000

Effective Life of Depreciable Assets: 10 years

Capital Works Cost: $265,000

Effective Life of Building: 40 years

Year Built: 2015

Annual Price Appreciation: Calculate using the 5 year average of Median Unit

Prices for 2-bedroom units in Mount Waverley (use data from realestate.com.au)

Part A
Prepare a discounted cash flow spreadsheet analysis reporting Net Present Value (NPV) and Internal Rate of Return (IRR) results for the potential investor who wants to purchase in her individual name. Assume the investor has sufficient cash to cover any cash shortfalls during the life of the investment. You can assume that if the property is purchased, it will be settled on 30th June 2017. Based on your results, should the investor purchase the investment property? Why or why not?

Part B
Partition the IRR and discuss your results. Conduct a sensitivity analysis utilizing two (only two) critical variables that might impact on Net Present Value. Explain the results and the key risks associated with this investment from your findings.

Part C

Now suppose that the investor is considering a longer investment horizon and suggests increasing the holding period from 5 years to 7 years. Please modify your discounted cash flow spreadsheet to calculate the Net Present Value (NPV) and Internal Rate of Return (IRR) results for a 7 year holding period (i.e. the property is sold at the end of year 7). Assume that she wishes to fix interest rates (Commonwealth bank have a 7-year fixed rate for investors) but all other assumptions remain unchanged. Comparing your results from Part A and Part C, would you advise her to invest for S or 7 years? Please justify your advice.