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

Asking price: $3,500,000, with the land valued at $500,000.

160 apartment units that rent for $450 per month with rent expected to increase by 4 percent per year starting in year 2.

Vacancy and bad debt allowance is 6 percent of the potential gross income (PGI).

Property taxes and insurance are expected to be constant over the investment horizon at $60,000 per year. Utilities, maintenance, management, and other operating expenses are expected to be 25 percent of annual effective gross income (EGI).

The real estate agent estimates that the value of the property will be $4.4 million at the end of the five-year investment horizon.

A 12 percent, 20-year mortgage for $2,400,000 is available with annual payments.

The investment horizon is five years, beginning January 2006 and ending December 2010. Your marginal capital gain tax rate is 28 percent and marginal income tax rate is 36 percent. (Assuming the depreciation recapture tax rate is in 2010, the depreciation recapture tax rate would be 25 percent.)

The investor has several profitable real estate investments and can utilize any tax losses. The apartment building has a depreciable life of 27.5 years.

The appropriate discount rate for this investment (the required rate of return) is 18 percent.

Required:

1) Calculate the relevant cash flows for this investment?

   2) What is the monthly debt service?