Angus Cartwright: Financial Analysis
Q1. What do the calculations in the various exhibits tell us? How valuable are they? What assumptions are inherent in each calculation? Which assumptions should we question and why?
The calculations in the various exhibits paint a very detailed financial picture of the subject properties. They are extremely valuable because they account for IRR, NPV, cash on cash return, tax effects, and much more. They allow an investor to account for many variables and assumptions relating to a given property.
There are several assumptions inherent in each calculation that may alter the actual returns of the investment. One assumption is the purchase and sale price, along with the cash flow from operations. Even though the broker may claim the property can be purchased for a certain price below asking, this may not necessarily be true. The gross incomes are another assumption that will alter the predicted outcomes if they turn out to be incorrect. The tax rates are also being assumed. Depending on who the investor is, the after tax profits will differ. Another assumption is the growth rates being applied to NOI along with occupancy rates. If one of the property’s vacancy rates drop below expected, and rents aren’t increased in a particular period, the IRR will be affected.
I personally believe all assumptions need to be questioned and verified – every source of income, expense, and price paid. The biggest assumptions that need to be questioned are the purchase and sale prices for each property. Cap rates need to be compared to other property transactions in the same market to determine if the going in cap rate is accurate or close. Depending on the property chosen, the sale price may account for a large portion of the future cash flows, and assuming a higher sale price will hinder IRR.
Q2. Using the method for financial analysis, employed by Cartwright for Allison Green, and assuming the figures given in the case, what are the financial returns for the other three
The calculations in the various exhibits paint a very detailed financial picture of the subject properties. They are extremely valuable because they account for IRR, NPV, cash on cash return, tax effects, and much more. They allow an investor to account for many variables and assumptions relating to a given property.
There are several assumptions inherent in each calculation that may alter the actual returns of the investment. One assumption is the purchase and sale price, along with the cash flow from operations. Even though the broker may claim the property can be purchased for a certain price below asking, this may not necessarily be true. The gross incomes are another assumption that will alter the predicted outcomes if they turn out to be incorrect. The tax rates are also being assumed. Depending on who the investor is, the after tax profits will differ. Another assumption is the growth rates being applied to NOI along with occupancy rates. If one of the property’s vacancy rates drop below expected, and rents aren’t increased in a particular period, the IRR will be affected.
I personally believe all assumptions need to be questioned and verified – every source of income, expense, and price paid. The biggest assumptions that need to be questioned are the purchase and sale prices for each property. Cap rates need to be compared to other property transactions in the same market to determine if the going in cap rate is accurate or close. Depending on the property chosen, the sale price may account for a large portion of the future cash flows, and assuming a higher sale price will hinder IRR.
Q2. Using the method for financial analysis, employed by Cartwright for Allison Green, and assuming the figures given in the case, what are the financial returns for the other three