Question

You are considering the purchase of an apartment building with the following information:

            Purchase price                                     $12,500,000

            Expected year 1 NOI                          $1,000,000

            Expected annual NOI growth             4%

            Expected Exit Cap Rate                      8.5%

            Holding Period                                    3 years

           

Solve for each of the following:

            Initial (going in) cap rate      __________                                                                             

            NOI for Year 4                                                            ____________

Expected sales price end of year 3           ______________                                         

            Net Present Value at 9% Discount Rate         _____________                                   

IRR            _______________                                                                                        

            Would you buy this asset for $12,500,000? Why or why not?

                                                                                                                                               

                                                                                                                                               

Answer 1

a) Initial Cap Rate = Expected 1 year NOI / Purchase Price = 1M / 12. 5 M = 8%

b) NOI for year 4 = 1,000,000 * (1.04^3) = $1,124,864

c) Sale Price = 12,500,000 * (1.085^3) = $15,966,114

d) NPV at 9% = $2,456,741.51 (table below)

Apartment Building - NPV
Year	Cashflow	Discount Factor	PV of Cashflow
0	-12500000	1.0000	-12500000.00
1	1000000	0.9174	917431.19
2	1040000	0.8417	875347.19
3	1081600	0.7722	835193.65
3 - Sale	15966114	0.7722	12328769.47
Net Present Value	2456741.51