Year Cash Flow
1 $695,000
2 876,250
3 1,057,500
4 1,238,750
5 1,420,000
1. Calculate the IRR and NPV of this project utilizing a 12% discount rate and a 15% cap rate. Ms. Brown
was able to secure a loan for $1,540,000, and an equity investor agreed to invest the remaining
$660,000 in exchange for 20% ownership in the project.
2. What is the loan-to-value ratio for this project?
3. What would the investor’s ROI be for this 5-year project if the restaurant achieved its budgeted operating
results for the year?
4. If the investor has a hurdle rate of 15%, does this project meet or exceed the investor’s requirements?
Concept Check
1. To calculate the IRR (Internal Rate of Return) and NPV (Net Present Value), you need to discount the cash flows at the appropriate rate. The IRR is the discount rate at which the NPV is equal to zero. The NPV represents the present value of all cash flows and is calculated by discounting each cash flow and summing them up.
To calculate the NPV and IRR, follow these steps:
Step 1: Determine the appropriate discount rate. In this case, the discount rate is 12%.
Step 2: Discount each cash flow. You can use the following formula:
PV = CF / (1 + r)^n
Where PV is the present value, CF is the cash flow, r is the discount rate, and n is the time period.
Step 3: Sum up all discounted cash flows to calculate the NPV.
Step 4: Use a financial calculator or software that allows you to calculate the IRR.
2. The loan-to-value (LTV) ratio is a measure of the loan amount as a percentage of the property's value. To calculate the LTV ratio, divide the loan amount by the property's value and multiply by 100.
In this case, the loan amount is $1,540,000, and the total project value is $1,540,000 + $660,000 = $2,200,000. Therefore, the LTV ratio would be:
LTV Ratio = (Loan Amount / Total Project Value) * 100
3. To calculate the investor's ROI (Return on Investment), you need to compare the investor's initial investment to the total return at the end of the project. The ROI is usually expressed as a percentage and can be calculated using the following formula:
ROI = (Total Return - Initial Investment) / Initial Investment * 100
In this case, the investor's initial investment is $660,000, and the total return would be the sum of the cash flows for the 5-year project.
4. If the investor has a hurdle rate of 15%, you can compare the project's IRR to the hurdle rate to assess if the project meets or exceeds the investor's requirements. If the project's IRR is higher than the hurdle rate, it meets the requirements; if it's lower, it doesn't meet the requirements.
Calculating the answers to these questions requires more information, such as any additional cash flows or assumptions about future cash flows. With the given information, you can follow the steps outlined above to calculate the IRR, NPV, LTV ratio, ROI, and evaluate if the project meets the investor's requirements.