Consider the following information: Purchase Price: 750,000 financed 80% at 7% rate of interest for 25 years (amortized monthly) Remaining After-tax…

Consider the following information:

  • Purchase Price: 750,000 financed 80% at 7% rate of interest for 25 years (amortized monthly)
  • Remaining After-tax Cash Flow from Operations – year 1: $33,000
  • Remaining After-tax Cash Flow from Operations – year 2: $22,000
  • Remaining After-tax Cash Flow from Operations – year 3: $31,000
  • Remaining After-tax Cash Flow from Operations – year 4: $28,000
  • Remaining After-tax Cash Flow from Operations – year 5: $26,000
  • Remaining After-tax Cash Flow from Operations – year 6: $30,000
  • Remaining After-tax Cash Flow from Operations – year 7: $32,000
  1. Calculate the owner’s equity (round to nearest dollar).
  2. Calculate the financed amount (round to nearest dollar).
  3. Scenario A: The investor decides to sell the property at the end of year 4 for $900,000. Calculate the loan payoff at the point of sale (this is a balloon payment calculation) — round answer to the nearest dollar.
  4. Calculate the IRR under Scenario A (round to tenth of a percent).
  5. Scenario B: The investor decides to sell the property at the end of year 7 for $1,100,000. Calculate the loan payoff at the point of sale (this is a balloon payment calculation) — round answer to the nearest dollar.
  6. Calculate the IRR under Scenario B (round to tenth of a percent).
  7. Which alternative Scenario A or Scenario B is probably the most desirable?

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