The use of financial leverage in purchasing an income-producing property can affect the amount of cash required at acquisition, the net cash flows from rental operations, the net cash flows from the eventual sale of the property, and the ultimate return on invested equity. Assuming the going-in IRR is greater than the effective borrowing cost, if an investor increases his leverage rate, say from 75% to 80%, we would expect which of the following to occur?

Question

Khalil Yang

Business

23 June, 12:50

The use of financial leverage in purchasing an income-producing property can affect the amount of cash required at acquisition, the net cash flows from rental operations, the net cash flows from the eventual sale of the property, and the ultimate return on invested equity. Assuming the going-in IRR is greater than the effective borrowing cost, if an investor increases his leverage rate, say from 75% to 80%, we would expect which of the following to occur?

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Brooklyn Short · Answer 1

Both Net present value (NPV) and going-in internal rate of return (IRR)

Explanation:

The Net present value (NPV) and internal rate of return (IRR) are methods that uses time value of money to analyse and evaluate expenditures. NPV absolutely measure the cost in cash of a value gained by doing a project while IRR relatively measures the estimate a potential project will yield.

Increasing financial leverage will result in a higher calculated Net present value (NPV) and going in internal rate of return (IRR).