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AB is a contractor, working in the NJ area, contemplating a real estate investment. The idea would be to purchase and remodel the Jersey Mansion,
AB is a contractor, working in the NJ area, contemplating a real estate investment. The idea would be to purchase and remodel the "Jersey Mansion", a large house with 7 rental units. AB has obtained the following information The market price of the house is $180,000 . Remodeling the house would cost $140,000 (paid at the time of the purchase) and it would take one full year. . Once remodeled, AB plans to rent each unit for $12,000 per year (paid at the beginning of the year) *AB will pay 2.5% of the current market price of the house in property taxes (paid at the beginning of every year once remodeled) . AB will do all the administrative work and all the maintenance work by himself. In order to do so, he would spend 300 hours per year and would reject other jobs in which he could make $40/hour. . AB has so far spent $15,000 searching for potential real estate investments. . The discount rate is 12%. QUESTIONS: a. What is the size of the initial investment? How much are revenues per year? How much are costs per year (excluding initial investment)? b. If AB keeps the house forever, what is the internal rate of return of the project? c. If AB keeps the house forever, what is the NPV of the project? d. If AB keeps the house forever, is buying the house an acceptable investment
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