As a real estate investor, you are interesting in purchasing a specific apartment building. You have done your due diligence looking at current leases and market conditions, and have talked with your investment team. The assumptions/calculations you have made about the investment cash flows are set out below.

purchase price of $3,500,000 with purchase costs of 2% of purchase price

the building contains 160 apartment units that rent for $5400 per year per unit, with rent expected to increase by 4% starting in year three (and for that increased rent amount to be the same in years 4 and 5)

vacancy and bad debt allowance is 6% of the potential gross income

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% of the annual effective gross income

given current market projections and maintenance projects you intend to undertake, you estimate that the value of the property will be $4,400,000 at the end of the five year investment horizon, with selling expenses of 5% of the sales price

you have consulted with your accountant, who told you that income taxes from operation will be as follows: yrs. 1 and 2: $59,368; yrs. 3-5: $67,309 (note: I am giving you the taxes owed, so you don't have to compute them, even though I showed you how to do this in the lecture)

your accountant also projects that income tax from the sale of the investment in 5 years will be $404,727

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

your investment horizon is five years, beginning this January

After evaluating the risk of this investment, you determine that your required rate of return is 15%

(1) Calculate the relevant cash flows for this investment (initial, operating, and terminal cash flows). Show your work.

(2) Calculate NPV and IRR. Show your work.

(3) Does the NPV and IRR indicate that you should pursue investing in this property? Why?

*USE EXCEL TO ANSWER THESE QUESTIONS AND SHOW THE FUNCTIONS USED*