Given the following information regarding an income producing property, determine the unlevered internal rate of return (IRR). Expected Holding Period: 5 years; 1ˢᵗ year Expected NOI: $89,100; 2ⁿᵈ year Expected NOI: $91,773; 3ʳᵈ year Expected NOI: $94,526; 4ᵗʰ year Expected NOI: $97,362; 5ᵗʰ year Expected NOI: $100,283; Debt Service in each of the next five years: $58,444; Current Market Value: $885,000; Required equity investment: $221,250; Net Sale Proceeds of Property at end of year 5: $974,700; Remaining Mortgage Balance at end of year 5: $631,026.
A) 10.6%
B) 12.2%
C) 22.9%
D) 33.4%

Question

Quizplus · Accepted Answer

The unlevered IRR is calculated based on the cash flows that do not consider debt financing (i.e., ignoring debt service and focusing on NOI and net sale proceeds). The unlevered cash flows are the NOIs plus the net sale proceeds at the end of the holding period. The initial investment is the current market value of the property. The unlevered IRR is the rate that makes the net present value (NPV) of these cash flows equal to zero. Given the provided cash flows and the initial investment, the correct unlevered IRR falls into the range that option B represents, indicating a return expectation without the impact of leverage.

Given the Following Information Regarding an Income Producing Property, Determine