1. Consider the following cash flows and reversion:There is an $80 000 cash outflow at time zero. BTCFs for years 1-4 respectively are $10 000 $20 000 $20 000 and $25 000. BTER for year 4 equals $50 000.A) Calculate the NPV of equity if the required rate of return equals 10%.B) Recalculate the NPV of equity if the required rate of return equals 15%.C) Calculate the internal rate of return.D) Should all investors accept this project?2. Consider the following cash flows and reversion:BTCFs for years 1-6 respectively are $10 000 $10 500 $12 000 $11 000 $13 000 and $10 000. BTER for year 6 equals $140 000. What is the maximum that the investor can pay to earn a 15% rate of return?3. Consider an apartment complex investment with a $500 000 purchase price. On a before-tax basis should the investor buy the project? Why or why not?A. First year’s gross rents = $500 per unit per month; there are 20 unitsB. Vacancies and bad debts are expected to be 7% of PGIC. First year’s operating expenses = $48 000D. LTV ratio = 80% on a 10% mortgage for 25 years with monthly compoundingE. Depreciable basis = 85% of the purchase priceF. Future sale price = $550 000G. Holding period = 60 monthsH. Marginal tax rate = 28%; Capital gains rate = 15%I. Require rate of return = 16%J. Growth rates: Gross rents = 5% per year; Operating expenses = 5% per yearK. Financing costs = $16 000; Acquisition costs = $0L. Prepayment penalty = 6%Problem Set #3: The Refinance Decision___________________________________________________________________________Five years ago you originated a $50 000 mortgage loan at 12% for 30 years with monthly compounding. Because rates are currently 10% you are considering refinancing the unpaid mortgage balance of your existing loan for 25 years with monthly compounding. Your current loan has a 2% prepayment penalty and the new lender will charge you $1 000 in refinancing costs. Assume your opportunity cost of capital equals 12%. Should you refinance if the new loan is held to maturity?
