As a commercial investment broker, you have been working with a potential investor for the last six months. The investors, Doctors William and Joan Carpenter, have sold the smaller apartment buildings they owned and want to purchase a larger apartment complex with the cash they received from sales. They would like to stay in the apartment sector because they are familiar with techniques needed to operate multifamily properties. They are looking forward to the ease of having all their real estate investment decisions limited to one property. The Carpenters would like to invest in the growing southwestern community in which they have settled. The area is demonstrating strong economic growth in all sectors. It has a mixed population in terms of age and excellent public services, parks and schools. The median income is over $40,000. Because of corporate growth, many executives and managers move to the town and rent for a while before buying a house. The rental market is strong. After viewing many apartment complexes, the Carpenters have asked you to provide a complete cash flow analysis for a 25-unit complex, The Iroquois, in the upscale neighborhood of Indian Trials. The three-year-old property is in excellent condition and it is unlikely that it will require any major repairs in the near future. Any repairs and maintenance anticipated over the next five years are reflected in the annual operating expenses. The property is available for $1,200,000 and if purchased will be acquired on the last day of this year. Working with your mortgage broker sources, the Carpenters received a commitment for a $900,000 loan with a 25-year term, a 9 percent annual interest rate, and monthly payments. The commitment was based on a 75 percent loan-to-value ratio. They received enough cash from the sale of their apartment buildings to make the required down payment ($300,000). Assume there are no points or closing costs. They are anticipating buying the property on the first day of the year and plan to hold the property for five years. The project disposition will occur on the last day of the year. The Carpenters have asked you to be conservative in your analysis. Based on your review of market data and the existing leases, you forecast a conservative potential rental income of $212,766 for year one. You forecast a 6 percent vacancy and credit loss in each year of the analysis, and operating expenses to be 40 percent of the gross operating income. Because the income and expenses are expected to increase over the holding period, you project the rate of inflation will increase at a rate of 3 percent per year. You explained to the Carpenters that your forecast of market capitalization rates for this kind of property five years from now would be in the 10 percent range. A 10 percent cap rate will be applied to year six NOI to calculate the sales price at the end of year five. Sale closing costs will be 6%. Your analysis will include a five-year forecast of the annual before- tax cash flows from operations and before-tax sales proceeds from the projected disposition. Finally, you will present the Carpenters with the IRRs the investment is projected to generate on a before-tax basis. The Carpenters are looking forward to receiving your complete cash flow analysis of the $1,200,000, 25- unit apartment complex. They would like you recommend (1) whether they should purchase the property, and if so, (2) at what price and (3) how you made your determination for your recommendation (why you are making this recommendation).