Case $2_{?}$

The Pheonix Investment Group buys and sells rental income properties in Lebanon. Mazen,

president of Phoenix, has asked for your assistance in analyzing a small apartment building the

group is interested in purchasing. The property in question is a small two$-$story structure with three

rental units on each floor. The purchase price of the property is $$170,000$ representing $$30,000$ in

land value and $$140,000$ in buildings and improvements. Phoenix will depreciate the buildings and

improvements value on a straight$-$line basis over $27\mathrm{.}5$ years. The Phoenix Group will make a down

payment of $$40,000$ to acquire the property and finance the remainder of the purchase price over

$20$ years with an $11\%$ fixed$-$rate loan with payments due annually. Figure $1($and the file

project$\_$spreadsheet.xls on Moodle$)$ summarizes this and other pertinent information.

Figure $1$

If all units are fully occupied, Mazen expects the property to generate rental income of $$35,000$ in the first

year and expects to increase the rent at the rate of inflation $($currently $4\%).$ Because vacancies occur and

some residents might not always be able to pay their rent, Mazen factors in a $3\%$ vacancy & collection

$($V&C$)$ allowance against rental income. Operating expenses are expected to be approximately $45\%$ of

rental income. The group's marginal tax rate is $28\%.$ If the group decides to purchase this property, their plans to hold it for $5$ years and then sell it to another investor. Presently, property values in this area are increasing at a rate of approximately $2\mathrm{.}5\%$ per year. The group will have to pay a sales commission of $5\%$ of the gross selling price when they sell the property.