Section B (2 Mark)You are considering the purchase of a quadruplex apartment.

Section B (2 Mark)

You are considering the purchase of a quadruplex apartment. Effective gross income (EGI) during the first year of operations is expected to be Rs33,600 (Rs700 per month per unit). First-year operating expenses are expected to be Rs. 13,440 (at 40 percent of EGI). Ignore capital expenditures. The purchase price of the quadruplex is Rs. 200,000. The acquisition will be financed with Rs60,000 in equity and a Rs. 140,000 standard fixed-rate mortgage. The interest rate on the debt financing is eight percent and the loan term is 30 years. Assume, for simplicity, that payments will be made annually and that there are no up-front financing costs.

What is the overall capitalization rate?