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 collection loss 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.