I would greatly appreciate if anyone would help me shed some

I would greatly appreciate if anyone would help me shed some light on this. Please refer to the attachment for the questions.

Solution

1) The difference of $1,550,000 is because in a first scenario we finance the project with the leverage(debt) and in the second scenario we did not use leverage to finance the project.

4). In the first scenario we invested $1,250,000 and in the second senario we invested 2,800,000. However, in the first scenario we get the higher proportion of cash flow with respect to the initial investment as compare to second investment therefore we get the higher IRR for the first scenario.

3) We Will calculate DSCR for first scenario.

DSCR= Net operating income/Total debt service

a) 1st year:- $200,000/$125,000= 1.60x

b) 2nd year:- $240,000/$125,000= 1.92x

c) 3rd year:- $245,000/$125,000= 1.96x

d) 4th year:- $250,000/$125,000= 2.00x

e) 5th year:- $260,000/$125,000= 2.08x

2). Cap rate:- Net icome/Invested capital (purchase price)

1st scenario first year cap rate:-

75,000/1,250,000=6%

2nd scenario first year cap rate:-

200,000/2,800,000= 7.14%

I hope above answer will help you in your assingment.

Kindly let me know if you have any questions.

Thanks