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Small Office Building Investment Two-story building Asking Price = $1.25 million Acquisition costs = 1% of purchase price Effective Age = 8 years Gross Leaseable Area = 20,000 square feet Net Leaseable Area = 18,200 square feet Brick/concrete/steel construction Parking Space = 7,000 square feet 1 Current Leases First Floor - Bank 9,500 sq. ft. for $10,500 per month with level payments for 3 more years with option to renew for 10 years for $12,000/month Second Floor - Insurance Company 6,200 sq. ft for $12.85/sq. ft. per year. Lease expires end of two years. New terms will be at market rate Second Floor - Law Office 2,500 sq. ft for $2,750/month; annual increase of 50% of CPI increase for next 5 years. At end of 5 years, space is expected to be rented at the market rate Current Tenants have “B” Credit Ratings 2 Operating Expenses Projections Management fees: 6% of effective gross income Property taxes: $20,000 in Year 1 and 2; 15% increase in Year 3 Utility expenses: $1.50/sq. ft. of gross building area; 5.5% increase per year Insurance: $.18/sq. ft. of net rentable area; 4% increase per year Janitorial expense: $.75/sq. ft. of gross area; 6% increase per year Maintenance: $.25/sq. ft. of gross area for year one; 4% increase per year 3 Vacancy and Credit Allowances •Building is currently 100% leased, but possibility tenant will leave before lease expiration •Vacancy and credit allowance under current lease is •2% per year for first two years •4% per year thereafter 4 Lease Comparable 1 •Signed two months ago • 5,000 square feet of net leaseable area • $14.50 per square foot • 10 year term •Not indexed • Option to renew for additional 5 years at $15.00/sq. ft. • Tenant is an accounting firm with “C” credit rating Building Profile 2-story structure with 18,500 sq. ft. of net leaseable area; similar to subject in structure. This is a newer building located in the same general location as subject. 5 Lease Comparable 2 •Signed one month ago •12,500 square feet net leaseable area •$14.25 per square foot •8 year term •Indexed to CPI •No additional options to the lease •Tenant is a dentist with an “A” credit rating Building Profile 2-story structure with 25,000 sq. ft. of net leaseable area; similar to subject in structure, but is in a better location 6 Lease Comparable 3 •Signed four months ago • 2,500 square feet of net leaseable area •$13.75 per square foot •3 year term •Renewable for additional 5 years at market rent •Indexed to CPI and contained expense-stop provision on property taxes •Tenant is a law firm with a “B” credit rating Building Profile 3-story structure with 36,500 sq. ft. of net leaseable area; same type of construction, age, and location as subject 7 Lease Comparable 4 •Signed two months ago •10,000 square feet of net leaseable area •$13.50 per square foot •3 year term •Indexed to CPI with expense-stops on insurance and property taxes above the current levels •Tenant is an insurance company with an “A” credit rating Building Profile 20,000 sq. ft. of net leaseable area; older than subject and is in the same general location 8 Lease Comparable 5 •Signed six months ago • 6,500 square feet of net leaseable area • $14.25 per square foot • 5 year term • Not indexed and had no other options • Tenant was a tanning salon with a “B” credit rating Building Profile 30,000 sq. ft. of net leaseable area; same age as the subject and is in the same general location 9 Market Trends • Rents expected to increase at CPI of 4% per year • Market vacancy rate of 5% seems typical • Selling prices of office properties have increased 5% over the past year • New construction of office buildings in the last year 10 Reversion Assumptions l Forecasted selling price at end of holding period uses a “going-out” cap rate of 13%. l Selling expenses are expected to be 3% of the selling price. l Holding period is 5 years. 11 Sales of Comparable Office Properties Comparables Characteristic 1 2 3 4 Sale Price $1,275,000 $1,250,000 $1,550,000 $1,135,000 Months since sale 2 4 6 2 Effective Gross Income at Sale $270,000 $247,000 $312,000 $216,000 Vacancy 5% 5% 7% 3% Operating Expenses at sale $110,500 $94,500 $125,000 $82,500 Property rights Leased fee Leased fee Leased fee Leased fee Construction Brick/Steel Brick/Steel Brick/Steel Brick/Steel Effective age 12 6 8 2 Number of Tenants 7 4 6 3 Tenant credit rating C B B A On-site parking (Square Feet) 6,000 5,500 7,500 6,000 Leaseablearea (Square Feet) 20,000 19,000 24,000 17,000 Gross area (Square Feet) 22,000 21,000 26,000 18,000 12 Comparable Land Sales Site has 90,000 square feet, and is in an average location and average topographical features. Comparable Land Sales Comparables 1 2 3 Sale Price $315,500 $225,000 $270,000 Sale Date 6 months ago 4 months ago 2 months ago Size (Square Feet) 125,000 85,000 110,000 Price per Sq. Ft. $2.52 $2.65 $2.45 Location Excellent Average Average Topography Average Poor Average 13 Land Market Trends • Land Prices have increased 6% over the past year • Land in excellent locations sell for 5% more • Topographical differences result in a 10% value differential 14 Construction Costs Base Construction Cost: $65 per square foot gross area Location Adjustment Factor: 0.95 Effective Age: 8 years Remaining Economic Life: 27 years Other depreciated site cost: $35,000 Entrepreneurial profit: $75,000 15 Mortgage Assumptions Mortgage Amount: 75% Loan-to value Interest Rate: 9% Maturity: 20 years (monthly amortization) Prepayment Penalty: 4.5% of outstanding balance Financing Costs: 2.5% of the amount borrowed 16 Depreciation and Tax Rates Depreciation • Straight Line Method • 39 years of useful life • Depreciable basis allocation: 80% to building, 20% to land Investor’s Tax Rates • Ordinary income tax rate: 35% • Capital gains tax rate: 20% • Depreciation recapture tax rate: 25% 17 Investor’s Required Rates of Return Equity Dividend Rate: 16.5% Equity Before-Tax Rate: 20% Equity After-Tax Rate: 12% 18 Question 1 Using information on comparable sales, calculate the following ratios: n Rent per leaseable square foot n Rent per gross square foot n Gross income multiplier n Operating expense ratio n Overall cap rate n Sale price per leaseable square foot n Sale price per gross square foot 19 Answer to Question 1 Ratios 1 2 3 4 Rent (leaseable) $13.50 $13.00 $13.00 $12.71 Rent (gross) $12.27 $11.76 $12.00 $12.00 GIM 4.72 5.06 4.97 5.25 OER 40.93% 38.26% 40.06% 38.19% Overall Cap Rate 12.50% 12.20% 12.06% 11.76% Sale Price per Sq. Ft. $63.75 $65.79 $64.58 $66.76 (leaseable) Sale Price per Sq. Ft. $57.95 $59.52 $59.62 $63.05 (gross) 20 Question 2 Analyze the rental comparables. What is the market rental rate? 21 Answer to Question 2 Summary of Lease Comparables Characteristic 1 2 3 4 5 Date 2 months ago 1 month ago 4 months ago 2 months ago 6 months ago Rent $14.50 $14.25 $13.75 $13.50 $14.25 Square Feet 5,000 12,500 2,500 10,000 6,500 Term 10 years 8 years 3 years 3 years 5 years Lease Options Not indexed; Indexed to Indexed to Indexed to Not indexed; option to CPI; no CPI; option CPI; no other renew at $15 other to renew at Expense- options options market rent; stop on Expense- insurance & stop on property property taxes taxes Age Newer Similar Similar Older Similar Location Similar Better Similar Similar Similar Size (Sq. Ft.) 18,500 25,000 36,000 20,000 30,000 Tenant Rating C A B A B 22 Answer to Question 2 Summary of Lease Comparables (con’t) Rent for Comparable 4 is at the lower end of the market at $13.50 Rent for Comparable 1 is the upper limit at $14.50 Market rent is around $14.00 23 Question 3 a. Forecast the net operating income under the existing leases for years 1 through 6. b. Forecast the net sale price at the end of year 5. c. At the discount rate of 14% for the net income stream, how much would the investor be willing to bid? 24 Answer to Question 3a 3a. Forecast NOI under the existing leases 1 2 3 4 5 6 Bank 126,000 126,000 126,000 144,000 144,000 144,000 Ins. Co. 79,670 79,670 93,883 97,638 101,544 105,605 Lawyer 33,00 33,660 34,333 5,030 35,720 42,583 PGI 238,670 239,330 254,216 276,658 281,264 292,188 Vacancy (4,773) (4,787) (10,169) (11,066) (11,251) (11,688) EGI 233,897 234,548 244,047 265,592 270,013 280,500 25 Answer to Question 3a (con’t) Expenses: Management 14,034 14,073 14,643 15,936 16,201 16,830 Prop. Tax 20,000 20,000 23,000 23,000 23,000 23,000 Insurance 3,276 3,407 3,543 3,685 3,832 3,985 Utilities 30,000 31,650 33,391 35,227 37,165 39,209 Janitor 15,000 15,900 16,854 17,865 18,937 20,073 Maintenance 5,000 5,200 5,408 5,624 5,849 6,083 Total (87,310) (90,230) (96,839) (101,337) (104,984) (109,180) Expenses NOI 146,587 144,314 147,209 164,254 165,029 171,320 26 Answer to 3b b. Forecast the net sale price at the end of Year 5: 175,320 SP = .13 = $ 1,317,846 3% selling expense = $39,535 Net sale price = 1,317,846 - 39,535 = $1,278,311 27 Answer to 3c c. How much to bid? Year NOI NSP PVF@14% PV 1 $146,587 .8772 $128,586 2 144,314 .7695 111,050 3 147,209 .6750 99,366 4 164,254 .5921 97,255 5 165,026 $1,278,311 .5194 749,671 Value = $1,185,928 $1.2 Million ( PV) 28 Question 4 a. Forecast the net operating income at the market rent for years 1 through 6. b. Forecast the net sale price at the end of year 5. c. At the discount rate of 14%, how much would the investor be willing to bid? 29 Answer to 4a Forecast NOI at Market Rental Rates Market rent of $14.00 (from Question 2) is used in these calculations Rents are expected to increase 4% per year. 1 2 3 4 5 6 PGI $254,800 $264,992 $275,592 $286,615 $298,080 $310,003 - VAC (12,740) (13,250) (13,780) (14,331) (14,904) (15,500) EGI 242,060 251,742 261,812 272,284 283,176 294,503 - OE (87,310) (90,230) (96,839) (101,337) (104,984) (109,180) NOI $154,750 $161,512 $164,973 $170,947 $178,192 $185,323 30 Answer to 4b b. Forecast the net sale price at the end of Year 5: 185,523 SP = .13 = $ 1,425,561 3% selling expense = $47,766 Net sale price = 1,425,561 - 47,766 = $1,382,794 31 Answer to 4c c. How much to bid? Year NOI NSP PVF@14% PV 1 $154,750 .8772 $135,747 2 161,512 .7695 124,283 3 164,973 .6750 111,357 4 170,947 .5921 101,214 5 178,192 $1,382,794 .5194 810,776 Value = $1,283,377 $1.28 Million ( PV) 32 Question 5 For the mortgage financing, at $1.25 million asking price, calculate the following: a. Monthly payment b. Annual payment c. Amortization schedule for years 1 through 5 d. Financing costs e. Prepayment penalty in Year 5 33 Answers to 5a and 5b a. Monthly Payment = $1,250,000 (.75) (.0089973) = $8,434.97 Note: Assume price paid is the asking price. The .0089973 is the monthly mortgage constant at 9% for 240 months. The annual mortgage constant is .0089973(12) = .108 b. Annual payment = $8,435 (12) = $101,220 34 Answer to 5c Amortization Schedule Amount Debt Year Interest Principal Outstanding Service 0 $ 937,500 1 919,943 $101,220 $83,663 $17,557 2 900,740 101,220 82,017 19,203 3 879,735 101,220 80,215 21,005 4 856,759 101,220 78,244 22,976 5 831,629 101,220 76,090 25,130 Note: The proportion of the mortgage outstanding at the end of year 5 is 831,629/937,500 = .88707. 35 Answers to 5d and 5e d. Financing costs = .025 ($937,500) = $23,438 e. Prepayment penalty = $831,629 (.045) = $37,423 36 Question 6 Forecast the BTCF for years 1 through 5 and the BTER in Year 5 at the $1.25 million asking price under: a. The lease rents b. The market rents 37 Answer to 6a 6a. Before-Tax cash flows at lease rent: Year 1 Year 2 Year 3 Year 4 Year 5 NOI 146,587 144,314 147,209 164,254 165,029 - DS (101,220) (101,220) (101,220) (101,220) (138,643)* BTCF 45,367 43,094 45,989 63,034 26,386 *includes prepayment penalty of $37,423. BTER at lease rent: NSP $ 1,278,311 -UM -831,629 BTER $ 446,682 38 Answer to 6b 6b. Before-tax cash flows at the market rent: Year 1 Year 2 Year 3 Year 4 Year 5 NOI 154,750 161,512 164,973 170,192 178,192 - DS (101,220) (101,220) (101,220) (101,220) (138,643)* BTCF 53,530 60,292 63,753 68,972 39,549 *includes prepayment penalty of $37,423. BTER at market rent: NSP $ 1,382,784 -UM -831,629 BTER $ 551,155 39 Question 7 Compute the NPV and IRR on equity at the $1.25 million asking price using: a. The lease rental BTCF’s and BTER b. The market rental BTCF’s and BTER 40 Answer to 7a At $1.25 million the investor’s cash outflow is: Downpayment: $312,500 + Financing Costs: 23,438 + Acquisitions Costs: 12,500 Total Equity: $348,438 41 Answer to 7a (con’t) NPV and IRR calculated based on before tax cash flows using the lease rental rates: Year Equity BTCF BTER PVF@20% PV 0 -348,438 1.0 -348,438 1 $45,367 .8333 37,804 2 43,094 .6944 29,926 3 45,989 .5787 26,614 4 63,034 .4823 30,398 5 26,386 $446,682 .4019 190,126 IRR= 17.0% NPV= - $33,570 42 Answer to 7b NPV and IRR using market rental rates: Year Equity BTCF BTER PVF@20% PV 0 -$348,438 1.0 -348,438 1 $53,530 .8333 44,607 2 60,292 .6944 41,867 3 63,753 .5787 36,894 4 68,972 .4823 33,265 5 39,549 $551,155 .4019 237,404 IRR = 23.82% NPV = $45,599 43 Question 8 a. Calculate the depreciation deduction for tax purposes, at the asking price of $1.25 million b. Calculate the adjusted basis and the cumulative depreciation deductions for Years 1 through 5 c. Calculate the taxable income and taxes from operation for years 1 through 5 under the existing leases d. Calculate the taxes due on sale in Year 5 e. Forecast the ATCF from operation for Years 1 through 5 f. Forecast the ATER from sale in Year 5 44 Answer to 8a Depreciable basis = .8(1,250,000 + 12,500) = 1,010,000 Depreciation deduction = 1,010,000/39 = $ 25,897 45 Answer to 8b Cumulative Depreciation Year Adjusted Basis Depreciation Deduction Deduction 0 $ 1,262,500 1 1,236,603 $ 25,897 $ 25,897 2 1,210,706 25,897 51,794 3 1,184,809 25,897 77,691 4 1,158,912 25,897 103,588 5 1,133,015 25,897 129,485 Adjusted Basis = Original Basis - Cumulative Depreciation + any capital expenditures 46 Answer to 8c Taxes from Operation 1 2 3 4 5 NOI $ 146,587 144,314 147,209 164,254 165,029 - Interest (83,663) (82,017) (80,215) (78,244) (113,513)* - Depreciation (25,897) (25,897) (25,897) (25,897) (25,897) - AFC** (1,172) (1,172) (1,172) (1,172) (18,750) TI 35,855 35,228 39,925 58,941 6,869 x Tax rate x .35 x .35 x .35 x .35 x .35 Taxes $ 12,549 12,330 13,974 20,629 2,404 * Includes prepayment penalty of $37,423 ** Amortized financing costs is $23,438/20 = 1,172 per year. Balance ($18,750) is taken in Year 5. 47 Answer to 8d Taxes due on sale: Sale Price $ 1,317,846 Capital Gain $ 15,811 -Selling Expenses -39,535 x Tax Rate x 0.2 Capital Gain Tax 3,162 Net Sale Price 1,278,311 -Adjusted Basis -1,133,015 Cum. Dep. Ded. $ 129,485 Total Gain 145,296 x Tax Rate x 0.25 Cum. Dep. Ded. -129,485 Tax on Dep. Recapture 32,371 Capital Gain 15,811 Tax Due on Sale = $3,162 + 32,371 = $35,533 48 Answer to 8e ATCF for Years 1-5 under existing leases 1 2 3 4 5 BTCF 45,357 43,094 45,989 63,034 26,386 - Taxes (12,549) (12,330) (13,974) (20,629) (2,404) ATCF 32,818 30,764 32,015 42,405 23,982 49 Answer to 8f ATER in Year 5 Sale Price $ 1,317,846 -Selling Expenses -39,535 Net Selling Price 1,278,311 -Unpaid Mortgage -831,629 BTER 446,682 -Taxes Due on Sale -35,533 ATER 411,149 50 Question 9 What is the NPV and IRR to the investor using the forecast of after-tax cash flows? 51 Answer to 9 Year Equity ATCF ATER PVF@12% PV 0 - $348,438 1.0 - $348,438 1 $32,818 .8929 29,303 2 30,764 .7972 24,525 3 32,015 .7118 22,788 4 42,405 .6355 26,948 5 23,982 $411,149 .5674 246,892 IRR = 12.15% NPV = 2,018 52 Question 10 Using the gross income multiplier approach, estimate the following: a. Leased-fee value b. Market value 53 Answers to 10a and 10b 10a. Using the comparable sales data, Comparables 2 & 3 yield a gross income multiplier of between 4.97 to 5.06. Leased-fee value = $233,897 * 5.0 = $1,169,485 $1.17 million 10b. The market value is: Market Value = $242,060 * 5.0 = $1,210,000 $1.21 million 54 Question 11 Using a market extracted cap rate, estimate the following: a. Lease-fee value b. Market value 55 Answers to 11a and 11b 11a. Using the comparable sales data, overall cap rate is 12.05% to 12.2% for comparables 2 and 3. Using a cap rate of 12.1% Leased fee value = 146,587/.121 = $1,211,463 $1.21 million 11b. The market value is: Market Value = 154,750/.121 = $1,278,926 $1.28 million 56 Question 12 Using the band of investment approach to derive the cap rate, estimate the: a. Lease-fee value b. Market value 57 Answers to 12a and 12b 12a. At the investor’s require dividend rate of 16.5% and the mortgage terms (75% loan-to-value, 9% interest rate, 20 years with monthly compounding) R = 0.108(0.75) + 0.165(0.25) = 0.122 Leased-fee value = 146,587/0.122 = $1,201,532 $1.2 million 12b. The estimated market value is: Market Value = 154,750/.122 = $1,268,443 $1.27 million 58 Question 13 Based on the comparable land sales, estimate the value of the site for the investment, using price per square foot as the unit of comparison. 59 Answer to 13 Adjustment Grid for Comparable land sales Characteristic 1 2 3 Sale Price $315,000 $225,000 $220,000 Size (Sq. Ft.) 125,000 100,000 110,000 Price per Sq. Ft. $2.524 $2.25 $2.455 Sale Date Adjustment + 3% + 2% 1% Adj. Price per Sq. Ft. $2.60 $2.30 $2.48 Location - 5% 0% 0% Topography 0% + 10% 0% Total Adjustment - 5% + 10% 0% Adj. Price per Sq. Ft. $2.47 $2.52 $2.48 Estimated land value: ($2.50)*(90,000) = $225,000 60 Question 14 Using the cost information, estimate the value using the cost approach. Base Construction Cost: $65 per square foot gross area Location Adjustment Factor: 0.95 Effective Age: 8 years Remaining Economic Life: 27 years Other depreciated site cost: $35,000 Entrepreneurial profit: $75,000 61 Answer to 14 Gross Building Area 20,000 Sq. Ft. Base building cost per sq. ft. $65.00 Location multiplier .95 Adj. Cost per sq. ft. $61.75 Reproduction cost of building $1,235,000 Less physical depreciation - 284,500 Depreciated cost of building 950,950 Plus other site improvements + 35,000 Plus entrepreneurial profit + 75,000 Plus land value + 225,000 Indicated value from cost $1,285,950 approach 62 Question 15 Comparable sales 2 and 3 appear to be the most similar to the subject property. Using the price per square foot of leaseable area as the unit of comparison, what is the indicated value? 63 Answer to 15 2 3 Selling Price $1,250,000 $1,550,000 Net leaseable area 19,000 24,000 Price per square foot 65.79 64.58 Time since sale 4 months 6 months Adjustment 1.62% 2.5% Adjusted price per square foot $66.89 $66.19 The indicated value per sq. ft. is about $66.50. Since the subject has 18,200 sq. ft. of net leaseable area, the total estimated value is: Value = 18,200 * $66.50 = $1,210,300 64 Question 16 Estimate the leased-fee value using mortgage-equity analysis assuming a 75% loan-to- value ratio at an interest rate of 9% with monthly amortization over 20 years. The equity required rate of return is 20%. 65 Answer to 16 146,587 .75(V)(.108) 144,314 .75(V)(.108) V .75(V) 1 2 (1.20) (1.20) 147,209 .75(V)(.108) 164,254 .75(V)(.108) 3 4 (1.20) (1.20) 165,029 .75(V)(.108) 1,278,311 .75(V)(.887071) 5 5 (1.20) (1.20) V .75(V) 2.9906(.75)(V)(.108) 146,587(.83333) 144,314(.69444) 147,209(.5 787) 164,254(.48225) 165,029(.40188) 1,278,311(.40188) .75(V)(.887071)(.401 88) V .75(V) .2422(V) 966,818 .26737(V) V .24043(V) 966,818 .75957(V) 966,818 V $1,272,850 66 Question 17 Why does the estimate of the value using mortgage-equity analysis in question 16 conflict with the result given in the NPV analysis in question 7a? 67 Answer to 17 The discounted cash flow analysis in question 7a accounts for all the cash outflows, including the acquisition costs, the financing costs and the mortgage prepayment penalty. The value estimated using mortgage-equity analysis in question 16 does not include these cash outflows. 68 Answer to 17 (con’t) Adjusting the value estimate in question 16 to include these results in the following: Acquisition costs (AC) = 1% of value Financing costs (FC) = 2.5% of the mortgage amount Prepayment Penalty (PP) = 4.5% of the unpaid mortgage balance In equation form: AC = .01(V) FC = .75(V)(.025) PP = .75(V)(.887071)(.045) 69 Answer Question 17 (con’t) The AC and FC are paid immediately and thus require no discounting. The prepayment penalty occurs in year 5 and is discounted at the 20% annual rate. In present value terms the prepayment penalty is: PVPP = .75(V)(.887071)(.045)(.40188) PVPP = .01203 70 Answer Question 17 (con’t) Adjusting the solution in question 16 to reflect these costs, V = .24043(V) + 966,818 - .01(V) - .75(V)(.025) - .75(V)(.887071)(.045)(.40188) V = .24043(V) + 966,818 - .01(V) - .01875(V) - .01203(V) V = .19965(V) + 966,818 .80035(V) = 966,818 V = $1,207,994 71 Answer Question 17 (con’t) Proof: Value = $1,207,991 ( $1,208,000) Mortgage = $1,208,000(.75) = $906,000 Debt Service = $906,000(1.08) = $97,848 Unpaid Balance at end of year 5 = $906,000(.887071) = $803,686 Prepayment Penalty at end of year 5 = $803,686(.045) = $36,166 Equity Outflow: Downpayment = $1,208,000(.25) = $302,000 Acquisition Costs = 1,208,000(.01) = $12,080 Financing Costs = .025(906,000) = $22,650 Total $336,730 BTER at end of year 5 = $1,278,311 - $803,686 = $474,625 72 Answer Question 17 (con’t) Year Equity NOI DS BTCF BTER 0 -$336,730 1 $146,587 $97,848 $48,739 2 144,314 97,848 46,466 3 147,209 97,848 49,361 4 164,254 97,848 66,406 5 165,029 134,014 31,015 $474,625 NPV = 0 IRR = 20% 73 Question 18 Summarize and analyze the various estimates of value. What are the advantages/disadvantages of each method for value estimation? Why is the leased-fee value less than the market value? What are the risks associated with this investment? How much would you be willing to bid for the investment? Justify your answer. 74 Answer Question 18 Techniques Leased-Fee Value Market Value 1. GIM $1,170,000 $1,210,000 2. Market Extracted Cap Rate $1,210,000 $1,280,000 3. Band of Investment $1,200,000 $1,270,000 4. Cost Approach ----- $1,290,000 5. Comparison Approach $1,210,000 ----- 6. Mortgage Equity Approach $1,272,850 ----- 7. Mortgage-Equity Approach $1,208,000 ----- (Adjusted) 75 Answer Question 18 (con’t) The discounted cash flow analysis at the asking price of $1,250,000 indicates that the NPV of equity is -$33,570 using the forecast of flows at the before-tax cash flows at the current lease rates. The NPV is +$2,018 using the after-tax cash flow forecasts. 76

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