Question

1. The local BMW dealer offers to sell you the new 7 seriesvehicle for 60 monthly payments of $735 (first payment 30 days fromnow). Given your FICO credit rating of 555 the BMW credit managerstates the interest rate on this loan will be 6.5% per annum or.5416% monthly. At the time you sign the loan documents what“value” are you paying for the BMW?

2. After purchasing the BMW, you tell Sally about the great dealyou received on the car. Sally loves the car and decides to visitthe same BMW dealer. Sally is offered to purchase the exact samevehicle model at the same monthly payment of $735 (for 60 months)as you. Sally’s FICO credit rating is 710 and the financingagreement states the interest rate on this loan will be 5.5% perannum or .4583% monthly. At the time Sally sign the loan documents,what “value” is Sally paying for the BMW?

3. What explanation can you give for the difference in “value”between your BMW purchase and Sally’s? Did she get a better orworse deal than you? What advice would you give to Sally aboutpurchasing her car?

4. After graduating from the Merage School of Business, you take ajob with a real estate investment company specializing purchasingand managing rental property focused on the student housing market.During the first week on the job, you are asked to determinewhether an apartment building, with an asking price of $8.0 million(nonnegotiable), is a good investment opportunity for thecompany. The required rate of return on all yourCompany’s real estate investments is 6.75%. Your marketresearch and financial modeling concludes the following:

1. Annual net cash flows (gross rents collected less all expenses)are as follows:

Year 1: $500,000

Year 2: $525,000

Year 3: $550,000

Year 4: $560,000 (datacontinued next page)

Year 5: $575,000

Year 6 and thereafter: $580,000

Based upon you investment return requirements, should you purchasethe apartment building?

5. A few weeks after completing your initial analysis you learnthat the city in which the apartment building is located may adopta building moratorium (curtail new building construction) due to apersistent water shortage brought on by the drought in California.You believe future growth in student enrollment at the nearbyuniversity combined with the reduction in available housing supplyin the future will allow rent increases in the first four years ofownership higher than originally forecasted. Updating yourfinancial model:

1. Annual net cash flows (gross rents collected less all expenses)are as follows:

Year 1: $575,000

Year 2: $600,000

Year 3: $640,000

Year 4: $650,000

Year 5: $670,000

Year 6 and thereafter: $695,000

Based upon your investment returnrequirements, should you purchase the apartment building (theseller has not adjusted their asking price despite the potentialbuilding moratorium)?

6. Immediately after completing your analysis for Question 4, yourcompany’s finance director notifies you that the company hasincreased its required rate of return to 7.5% on all new realestate investments. The finance director states that the increasein the required rate of return stems from the increase in interestrates brought on by the Federal Reserve Banks recent actions toincrease interest rates. Using the cash flow data from Question 4,what is your recommendation regarding whether the building shouldbe purchased at the seller’s asking price of $8.0 million.