problem 1: Consider the given cash flows and reversion:

There is an $80,000 cash outflow at time zero. BTCFs for years 1-4, respectively, are $10,000, $20,000, $20,000, and $25,000. BTER for year 4 equals $50,000.

A) find out the NPV of equity if the required rate of return equals 10%.

B) Refind out the NPV of equity if the required rate of return equals 15%.

C) find out the internal rate of return.

D) Should all investors accept this project?

problem 2: Consider the given cash flows and reversion:

BTCFs for years 1-6, respectively, are $10,000, $10,500, $12,000, $11,000, $13,000, and $10,000. BTER for year 6 equals $140,000. What is the maximum that the investor can pay to earn a 15% rate of return?

problem 3: Consider an apartment complex investment with a $500,000 purchase price. On a before-tax basis, should the investor buy the project? Why or why not?

A) First year’s gross rents = $500 per unit per month; there are 20 units

B) Vacancies and bad debts are expected to be 7% of PGI

C) First year’s operating expenses = $48,000

D) LTV ratio = 80% on a 10% mortgage for 25 years with monthly compounding

E) Depreciable basis = 85% of the purchase price

F) Future sale price = $550,000

G) Holding period = 60 months

H) Marginal tax rate = 28%; Capital gains rate = 15%

I) Require rate of return = 16%

J) Growth rates: Gross rents = 5% per year; Operating expenses = 5% per year

K) Financing costs = $16,000; Acquisition costs = $0

L) Prepayment penalty = 6%

problem 4: The Refinance Decision

Five years ago you originated a $50,000 mortgage loan at 12% for 30 years with monthly compounding. Because rates are currently 10%, you are considering refinancing the unpaid mortgage balance of your existing loan for 25 years with monthly compounding. Your current loan has a 2% prepayment penalty and the new lender will charge you $1,000 in refinancing costs.  Assume your opportunity cost of capital equals 12%. Should you refinance if the new loan is held to maturity?