I I$-60$ MACRS and Low$-$Income Housing

Aaron Hersch is a real estate developer who specializes in residential apartments. A complex of $20$

run$-$down apartments has recently come on the market for $$332,500.$ Hersch predicts that after remod$-$

eling, the $12$ one$-$bedroom units will rent for $$380$ per month and the $8$ two$-$bedroom apartments for

$$440.$ He budgets $15\%$ of the rental fees for repairs and maintenance. It should be $30$ years before the

apartments need remodeling again, if the work is done well. Remodeling costs are $$15,000$ per apart$-$

ment. Both purchase price and remodeling costs qualify as $27\mathrm{.}5-$year MACRS property.

Assume that the MACRS schedule uses the straight$-$line method. It divides the total cost recovery

amount by $27\mathrm{.}5$ and assigns a full year of depreciation to year $1$ and a half year to year $28.$

Hersch does not believe he will keep the apartment complex for its entire $30-$year life. Most likely

he will sell it just after the end of the tenth year. His predicted sales price is $$980,000.$

Hersch's required rate of return is $10\%,$ and his tax rate is $38\%.$

Should Hersch buy the apartment complex? What is the after$-$tax NPV$?$ Ignore tax complications,

such as capital gains.