A real estate broker is offering an apartment building for sale that has the following characteristics:

a. The asking price is $3.5M, with land valued at $500,000.

b. The 160 apartment units rent for $450 per month with rent expected to increase by 4% per year starting at year 2.

c. Vacancy and bad debt allowance is 6% of the potential gross income.

d. Operating expenses are expected to be 32% of effective gross income.

e. The real estate agent estimates that the value of the property, net of selling expenses, will be $4.4M at the end of a five - year investment horizon.

f. A 12%, 20 - year mortgage for $2M is available with monthly payments.

g. The cost recovery allowance recapture rate is 25%.

h. The investors ordinary income tax rate is 28%.

i. The investors capital gain tax rate is 15%.

j. The appropriate discount rate for this investment (required return) is 18%.

Calculate the relevant cash flows for this investment and apply the NPV and IRR rules to decide whether to pursue this project

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