NPV Question!!

rezje Wrote: ------------------------------------------------------- > supersadface Wrote: > -------------------------------------------------- > ----- > > Rezje- > > > > Just cranked out what I’m about 95% sure is the > > answer in excel. Almost anyone who’s studied > and > > sat for the exams can walk you through this, > but > > first let’s see some work from you. Show us > your > > calculations for years 1, 2, and the final sale > > proceeds as best you can. > > > > More than happy to help, but don’t just dump > the > > problem on the forums without showing us you’ve > > taken a swing at it, brosef. > > > > > > Yr. 0 Yr 1. Yr. 2 > Rent revenue > $300,000.00 300,000.00 \> Maintenance and Taxes \> (35,000.00) $(35,000.00) > Net Operating Income > $265,000.00 $265,000.00 > Debt Service > $234,919.00 $234,919.00 > Cash Flow Before Taxes > $30,081.00 $30,081.00 > Ppal Amt. > $34,919.00 38,410.90 \> Depreciation \> (60,000.00) $(60,000.00) > Cash Flow Before Taxes > $5,000.00 $8,491.90 > Taxes > $1,750.00 $2,972.17 > Cash Flow After Taxes > $3,250.00 $5,519.74 > > Balance Owed, beg. Year. > $2,000,000.00 $1,965,081.00 > Annual Mortgage Pmt > $234,919.00 $234,919.00 > Int. Portion of Pmt. > $200,000.00 $196,508.10 > Amt. of Principal > $34,919.00 $38,410.90 > Balance Owed, end. Year > $1,965,081.00 $1,926,670.10 > > When I calculate NPV with these numbers I get: > CF0 = -500,000 \> CF1 = 3,250 > CF2 = $ 5519.74 > CF3 = 610,000 \> \> NPV = -34,181.65 > > I’m not sure about the calculation of sale > proceeds you asked for. If you could give me a > little insight if I’m in the right path, I would > appreciate it. Thank you. > > P.S. Thanks to all of the other posts as well. > Even though I don’t appreciate the sarcasm and > insults of some other people, still I appreciate > it. I couldn’t post yesterday due to time > constraints. You get an ‘F’ for ethics and overall finance acumen. No wonder you’re in summer school.

Rezje, Your CF1 and CF2 numbers are wrong, causing your NPV to be low. What you’ve arrived at is net income. You need to make two adjustments to arrive at cash flow for each period. Let me know if you have some guesses.

Rezje- First off, thank you for attempting the problem and showing your work. My overwhelming experience has been that if you show your professors (in school) and colleagues (in ‘real life’) that you have made a good, intelligent effort at a problem, they will not scorn you if you ask for help. However, if you haven’t put in the time or effort and expect them to bail you, they will absolutely look at you with scorn and derision. You are, in effect, telling them, “I don’t value your time as highly as mine. YOU do this.” As to the problem: You’ve actually gotten the most difficult part correct, so well done. You broke down mortgage interest and principal payments correctly and correctly deducted the mortgage interest. You’ll see even some of the posters here missed that. You messed up in two spots. You wrote: Cash Flow Before Taxes $5,000.00 $8,491.90 Incorrect! You have correctly computed Net Operating Income before taxes. This number gets taxed, and then we add back a certain non-cash charge. Only then do we have after-tax cashflows, which is the number we’re going to need to do an NPV calc. I LEAVE IT TO YOU TO SOLVE THE MYSTERY OF WHAT THE NON-CASH CHARGE WE’RE ADDING BACK IS. The other mistake I identify is you wrote: CF0 = -500,000 CF1 = [wrong, re-do it] CF2 = $ [wrong, re-do it] CF3 = $610,000 With your $610,000, you’ve picked the correct number, but put it at the wrong time. Fix it. You’re not far off. Read my suggestions, put in another 10 minutes, and I’m sure you’ll get it. -SSF

supersadface Wrote: ------------------------------------------------------- > Rezje- > > First off, thank you for attempting the problem > and showing your work. My overwhelming experience > has been that if you show your professors (in > school) and colleagues (in ‘real life’) that you > have made a good, intelligent effort at a problem, > they will not scorn you if you ask for help. > However, if you haven’t put in the time or effort > and expect them to bail you, they will absolutely > look at you with scorn and derision. You are, in > effect, telling them, “I don’t value your time as > highly as mine. YOU do this.” > > As to the problem: > > You’ve actually gotten the most difficult part > correct, so well done. You broke down mortgage > interest and principal payments correctly and > correctly deducted the mortgage interest. You’ll > see even some of the posters here missed that. > > You messed up in two spots. You wrote: > Cash Flow Before Taxes $5,000.00 $8,491.90 > > Incorrect! You have correctly computed Net > Operating Income before taxes. This number gets > taxed, and then we add back a certain non-cash > charge. Only then do we have after-tax cashflows, > which is the number we’re going to need to do an > NPV calc. I LEAVE IT TO YOU TO SOLVE THE MYSTERY > OF WHAT THE NON-CASH CHARGE WE’RE ADDING BACK IS. > > The other mistake I identify is you wrote: > CF0 = -500,000 \> CF1 = > CF2 = $ > CF3 = $610,000 > > With your $610,000, you’ve picked the correct > number, but put it at the wrong time. Fix it. > > You’re not far off. Read my suggestions, put in > another 10 minutes, and I’m sure you’ll get it. > > -SSF Wouldn’t he add another year of AT CF’s for year 3 on top of the 610k (the 610k is the sales proceeds, not the revenues)?

No, sale goes on cf2 as ssf said. But it’s not just the non cash charge add back that’s missing. He also needs to subtract out a certain mystery charge.

supersadface Wrote: ------------------------------------------------------- > Rezje- > > First off, thank you for attempting the problem > and showing your work. My overwhelming experience > has been that if you show your professors (in > school) and colleagues (in ‘real life’) that you > have made a good, intelligent effort at a problem, > they will not scorn you if you ask for help. > However, if you haven’t put in the time or effort > and expect them to bail you, they will absolutely > look at you with scorn and derision. You are, in > effect, telling them, “I don’t value your time as > highly as mine. YOU do this.” > > As to the problem: > > You’ve actually gotten the most difficult part > correct, so well done. You broke down mortgage > interest and principal payments correctly and > correctly deducted the mortgage interest. You’ll > see even some of the posters here missed that. > > You messed up in two spots. You wrote: > Cash Flow Before Taxes $5,000.00 $8,491.90 > > Incorrect! You have correctly computed Net > Operating Income before taxes. This number gets > taxed, and then we add back a certain non-cash > charge. Only then do we have after-tax cashflows, > which is the number we’re going to need to do an > NPV calc. I LEAVE IT TO YOU TO SOLVE THE MYSTERY > OF WHAT THE NON-CASH CHARGE WE’RE ADDING BACK IS. > > The other mistake I identify is you wrote: > CF0 = -500,000 \> CF1 = > CF2 = $ > CF3 = $610,000 > > With your $610,000, you’ve picked the correct > number, but put it at the wrong time. Fix it. > > You’re not far off. Read my suggestions, put in > another 10 minutes, and I’m sure you’ll get it. > > -SSF SSF, Thank you for the advice on effort. I appreciate it. Regarding the problem, I made some corrections. I added back depreciation, which would be the only non-cash charge there is, am i correct? These are the numbers I got: CF0: -500,000 CF1: 63,250 CF2: $ 65,520 Regarding CF3, since it says that you get the $610,000 after the loan balance is repaid, do I have to put it in t=20? Like CF20? Thanks for all the help!

Black Swan: I thinks you may be right. It is hard to go from my spreadsheet to AnalystForum and make sure I’m hitting every line. Rezje: C’mon, the CF3 issue shouldn’t be too hard. You have FOUR cashflows to think about. You are getting mixed up with the timing of flows which is a Big Deal (note capital letters) when you’re doing NPV or IRR calcs. Cashflow 1: You invest money in this property. Cashflow 2: You get some money from rental income that you get to keep your grubby hands on after all the bad stuff. Hooray! Cashflow 3: You get a second year of rental income that you get to keep your still-grubby hands on after all the bad stuff. COULD LIFE GET ANY BETTER? Cashflow 4: You sell the property, pay off the mortgage and taxes and gambling debts you’ve incurred, etc. You’re left with more money. “HOLY CRAP,” you think. “LOOK AT ME, EVERYONE, I’M LIKE ROBERT KIYOSAKI OVER HERE.” Cut and paste the four cashflows I’ve described here. Tell me the amounts (best guess if you’re not sure) and what years they occur in.

Rezje, look at your cf1 and cf2, you’re closer, but there’s one more cost that has to come out (hint: reread all my posts). Also, keep looking at the timing of the sale cash flow.

supersadface Wrote: ------------------------------------------------------- > Black Swan: I thinks you may be right. It is > hard to go from my spreadsheet to AnalystForum and > make sure I’m hitting every line. > > Rezje: C’mon, the CF3 issue shouldn’t be too > hard. You have FOUR cashflows to think about. > You are getting mixed up with the timing of flows > which is a Big Deal (note capital letters) when > you’re doing NPV or IRR calcs. > > Cashflow 1: You invest money in this property. > Cashflow 2: You get some money from rental income > that you get to keep your grubby hands on after > all the bad stuff. Hooray! > Cashflow 3: You get a second year of rental > income that you get to keep your still-grubby > hands on after all the bad stuff. COULD LIFE GET > ANY BETTER? > Cashflow 4: You sell the property, pay off the > mortgage and taxes and gambling debts you’ve > incurred, etc. You’re left with more money. > “HOLY CRAP,” you think. “LOOK AT ME, EVERYONE, > I’M LIKE ROBERT KIYOSAKI OVER HERE.” > > Cut and paste the four cashflows I’ve described > here. Tell me the amounts (best guess if you’re > not sure) and what years they occur in. This is what I came up with. NPV 115,780.77 CF0: (500,000.00) CF1: 63,250.00 CF2: 65,519.74 CF2: $ 610,000.00 I make the sale in CF2, so I guess the $610,000 proceeds are added to CF2, am I right? Black Swan, Regarding the other cost that has to come out, I can’t find any other non-cash charge. What mystery charge is it?

It’s not non-cash. Can you please look at my prior posts, I dunno, like maybe the one where I demonstrated The calculations for how to get the correct answer for cf 1?

Black Swan Wrote: ------------------------------------------------------- > It’s not non-cash. Can you please look at my > prior posts, I dunno, like maybe the one where I > demonstrated The calculations for how to get the > correct answer for cf 1? Black Swan, Thank you so much! I think I got it! CF0: - 500,000 CF1: 28,331 CF2: $ 23,109 + $610,000 NPV: 52,291.68

Thank you SSF and Black Swan for all your help! I really appreciate it! I hope you have an excellent day!

For cf2, I keep getting 27.108835, but I’m doing this on my cell, so it could be me. Walk me through your cf2 calc

You had the right pre and post tax numbers before, so it must be something you’re doing after that with the add backs.

Oops! I messed up sorry. You’re right. CF2: 5,519.74+60,000-38,410 = 27,108.84 I actually used that number, I must have put something else in the last post.

Nice work. I’ll check against the spreadsheet I put together at work, but I think you’re good. Also, glad you got the sale proceeds thing finally! Yes, you have TWO cashflows that occur in year two.

Yep, matches my spreadsheet NPV 52.29168

{pat on back}