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nces Problem 7-4 An Investor is considering the acquisition of a "distressed property" which is on Northlake Bank's REO list. The property is available for $204,000 and the Investor estimates that he can borrow $160,000 at 4.5 percent interest and that the property will require the following total expenditures during the next year: Inspection Title search Renovation Landscaping Loan interest Insurance Property taxes Selling expenses Required: $ 560 1,120 13,000 920 7,260 1,860 6,060 8,000 a. The Investor is wondering what such a property must sell for after one year in order to earn a 20 percent return (IRR) on equity. b. The lender is now concerned that if the property does not sell, Investor may have to carry the property for one additional year. He belleves that he could rent it (starting in year 2) and realize a net cash flow before debt service of $2,400 per month. However, he would have to make an additional $8,400 in Interest payments on his loan during that time, and then sell. What would the price have to be at the end of year 2 in order to earn a 20 percent IRR on equity?

nces Problem 7-4 An Investor is considering the acquisition of a "distressed property" which is on Northlake Bank's REO list. The property is available for $204,000 and the Investor estimates that he can borrow $160,000 at 4.5 percent interest and that the property will require the following total expenditures during the next year: Inspection Title search Renovation Landscaping Loan interest Insurance Property taxes Selling expenses Required: $ 560 1,120 13,000 920 7,260 1,860 6,060 8,000 a. The Investor is wondering what such a property must sell for after one year in order to earn a 20 percent return (IRR) on equity. b. The lender is now concerned that if the property does not sell, Investor may have to carry the property for one additional year. He belleves that he could rent it (starting in year 2) and realize a net cash flow before debt service of $2,400 per month. However, he would have to make an additional $8,400 in Interest payments on his loan during that time, and then sell. What would the price have to be at the end of year 2 in order to earn a 20 percent IRR on equity?

Managerial Accounting
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 16E
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nces Problem 7-4 An Investor is considering the acquisition of a "distressed property" which is on Northlake Bank's REO list. The property is available for $204,000 and the Investor estimates that he can borrow $160,000 at 4.5 percent interest and that the property will require the following total expenditures during the next year: Inspection Title search Renovation Landscaping Loan interest Insurance Property taxes Selling expenses Required: $ 560 1,120 13,000 920 7,260 1,860 6,060 8,000 a. The Investor is wondering what such a property must sell for after one year in order to earn a 20 percent return (IRR) on equity. b. The lender is now concerned that if the property does not sell, Investor may have to carry the property for one additional year. He belleves that he could rent it (starting in year 2) and realize a net cash flow before debt service of $2,400 per month. However, he would have to make an additional $8,400 in Interest payments on his loan during that time, and then sell. What would the price have to be at the end of year 2 in order to earn a 20 percent IRR on equity?
Transcribed Image Text:nces Problem 7-4 An Investor is considering the acquisition of a "distressed property" which is on Northlake Bank's REO list. The property is available for $204,000 and the Investor estimates that he can borrow $160,000 at 4.5 percent interest and that the property will require the following total expenditures during the next year: Inspection Title search Renovation Landscaping Loan interest Insurance Property taxes Selling expenses Required: $ 560 1,120 13,000 920 7,260 1,860 6,060 8,000 a. The Investor is wondering what such a property must sell for after one year in order to earn a 20 percent return (IRR) on equity. b. The lender is now concerned that if the property does not sell, Investor may have to carry the property for one additional year. He belleves that he could rent it (starting in year 2) and realize a net cash flow before debt service of $2,400 per month. However, he would have to make an additional $8,400 in Interest payments on his loan during that time, and then sell. What would the price have to be at the end of year 2 in order to earn a 20 percent IRR on equity?
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