Calculation of annual net cash-flows and cash-flow techniques

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Calculation of annual net cash-flows and cash-flow techniques

Description
This assignment has two sections. Question 1 examines your ability to calculate annual net cash-flows and perform discounted cash-flow techniques to make an investment decision (as presented in topic 4). Question 2 requires you to investigate Modern Portfolio Theory. You are required to estimate three portfolios from three different Australian REITs and also two US REITs, their expected return and risk. You are also required to build an efficient frontier for the different portfolio combinations of the five listed Australian REITs.

Task
Question 1
It is 2020 and you are considering the purchase of an investment property. The property is for sale at $900,000. If you go ahead with the purchase, settlement will occur in January 2021. The property is currently leased, with a gross rent amount of $41,600 per annum. The lease agreement has an expiry date of December 2025 and has annual lease adjustments linked to CPI on January each year. The table below provides you with information regarding the property. You anticipate that both outgoing recoveries and operating expenses will grow at 2.50% per annum in the near future. (Table is in the attachment)
Part a)
Firstly, calculate your total cost of the purchase

Part b)
Secondly, calculate the annual net rent from the property over the period of 2020 until 2023.

Part c)
Thirdly, through examination of historical capital growth for comparable properties, you have observed, on average, a 5.8% annual appreciation in capital values. Using this information, also estimate the expected sale price of this property in 2023.

Part d)
Fourthly, assume now that if you go ahead with the purchase, you intend to sell the property in 2024 for the price calculated in part c) and you will incur selling expenses of 3.10%. Also, calculate the net present value (NPV), profitability index (PI) and the internal rate of return (IRR) on your investment if you have a required rate of return of 4.50%. Assume a company tax rate of 0%.
Part e)
Lastly, would you invest in this property? Why/why not?

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