(NPV and IRR with alternative costs) Mr. Fox has just bought an old apartment for $1,000,000. Mr. Fox plans to rent out the apartment. The apartment in its current condition can be rented out for $3,500 at the end of each month forever.

An alternative to renting out the apartment in its current condition is to do a renovation. The renovation is expected to last 12 months (during this period Fox cannot rent the apartment), and the renovation cost is expected to be $50,000 today and an additional $2,000 at the end of each month for 12 months. After the renovation Mr. Fox can rent out the apartment for $4,000 per month.

Assume that Mr. Fox’s cost of capital is 0.5% monthly.

a. Should Mr. Fox invest in the apartment renovation?

b. What is the yearly alternative cost of capital that will make Mr. Fox indifferent between doing, or not doing, the renovation?

c. What is the monthly rent after the renovation that will make Mr. Fox indifferent between doing, or not doing, the renovation?