1. A real estate broker is offering an apartment building for sale that has the following characteristics:
   1. The asking price is $3.5 million with the land valued at $500,000.
   2. The 160 apartment units rent for $250 per month with rent expected to increase by 4% per year starting in year 2.
   3. Vacancy and bad debt allowance is 6% of the potential gross income each year.
   4. Operating expenses are expected to be 32% of effective gross income each year.
   5. The real estate agent estimates that the value of the property will be $4.4 million at the end of 5 year investment horizon.
   6. A 12 percent, 20 year mortgage for $2 million is available with monthly payments.
   7. The investment horizon is 5 years beginning January 2007 and ending December 2012. The investors ordinary income tax rate is 28 percent and his or her capital gain tax rate is 15%. The investor has several profitable real estate investments and can utilize any tax losses. The appropriate discount rate for this investment is 18%.

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