You are an employee of University Investment Consultants, Ltd. and have been given
the following assignment. You are to present an investment analysis of a new small
residential income producing property for sale to a potential investor. The asking
price for the property is $1,200,000; rents are estimated at $200,000 during the first
year and are expected to grow at 2.5 percent per year thereafter. Vacancies and
collection losses are expected to be 10 percent of rents. Operating expenses will be
35 percent of effective gross income. A 70 percent loan can be obtained at 10 percent interest for 30 years. The property is expected to appreciate in value at 2.5 percent per year and is expected to be owned for five years and then sold. Fees and expenses involved in resale of the property is expected to be 2% of the selling price.

a. What is the investor’s expected before tax IRR on equity invested?
b. What is the first year debt coverage ratio?
c. What is the terminal cap rate?
d. What is the NPV using a 14 percent discount rate?