chapter 19: Investment Decisions: NPV and IRR

Question 1

investment value vs. market value

Answer 1

investment is the price the investor is willing to pay

Question 2

sale price at end of year N

Answer 2

NOI of next year/Going-Out cap rate as a %

Question 3

leverage

Answer 3

the use of mortgage debt to help finance capital investment

Question 4

unlevered cash

Answer 4

the expected annual stream of NOIs and the expected Net Sale Proceeds
-represents the income producing ability of the property before subtracting the portion of the annual cash flows that must be paid to the lender to service or retire the debt

Question 5

levered cash flows

Answer 5

the property’s income after subtracting any payments due the lender

Question 6

before-tax cash flows

Answer 6

annual NOI - annual debt service
or
NOI - estimated annual mortgage payment
-used in valuation of the cash flows to the equity investor instead of the NOIs

Question 7

net present value

Answer 7

PV of the inflows - PV of the outflows

Question 8

after tax equity reversion

Answer 8

the before tax equity reversion (net selling price - remaining mortgage balance) at the time of sale - taxes due on sale