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

Initial cap rate= NOI in year1/ Initial investment = 1000000/12500000 =8%

NOI for year4 = 1,000,000*(1+.04)^3 =1124864 ; NOI Year3= 1081600

Expected sales price at end of year 3= NOI/Exit cap rate = 1081600/8.5% =12724705

NPV @9% dicount ;

Year	0	1	2	3
Investment	-12500000			12724705
Income		1000000	1000000	1000000
Total cashflows	-12500000	1000000	1000000	13724705
NPV @9%	-$142,898.34

NPV can be calculated from excel npv formula as shown. NPV =-142898 for a perod of 3 years

IRR: =8.55% ;

We cant buy this asset since npv is negative and IRR is less than discount rate of npv