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Homework answers / question archive / You are considering a real estate investment with the following parameters and a five year holding period
You are considering a real estate investment with the following parameters and a five year holding period. Calculate the unlevered and levered NPV and IRR. Please make your calculations to the "right of the data" on this worksheet. Based solely on these calculations, would you proceed with the investment and why?
Purchase price 22,000,000
Anticipated NOI
Year 1 1,500,000
Year 2 1,600,000
Year 3 1,800,000
Year 4 2,000,000
Year 5 2,100,000
Year 6 (stabilized) 2,150,000
Financing
LTV 70.0%
Payment frequency Monthly
Mortgage rate 3.5%
Mortgage rate per month 0.2896%
Term (years) 5
Amortization (years) 25
Anticipated cap rate on sale 9.0%
Required Equity Return 15.0%
Required WACC 10.0%
Answer:
If IRR is more than required return then we should proceed with the investment. In this example, Unlevered IRR of 9.50% is less than required equity return of 15% but levered IRR of 14.75% is more than required WACC of 10%. Thus we should proceed with the investment with leverage (financing) only.
Step-by-step explanation
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