multiple choice Q:

Suppose that you are considering an investment in an apartment building.The specifics are:

- The building is five years old, has a 85 percent occupancy rate, and has an expected useful life of 30 years. Assume that this occupancy rate is expected to continue for the life of the building.

- There are 130 2-bedroom units, 150 1-bedroom units, and 90 studios.

- The 2-bedroom units rent for $5500 per month, the 1-bedroom units for $4000 per month, and the studios for $900 per month.

- Current rent control laws will prevent the rents from ever being raised.

- The estimated annual maintenance cost for the building is $1800000 per year (this is independent of the number of apartments rented).

- There is an additional estimated maintenance cost at $145 per unit per month, when each unit is rented.

- There will be no salvage value to the building in 30 years, but it is estimated that it will cost 5 million dollars at that time to demolish the building as will be required in the purchase contract. (You are not purchasing the land. You will have a 30-year lease of the land, which is paid for in the purchase of the building.)

- The asking price of the building is $80 million.

- The tax-rate is 38%, and assume the building will be fully depreciated over its useful life.

- The WACC is 8%.

Develop the pro-forma income statement, compute the Operating Cash-Flows and NPV. Conduct a financial (NPV) breakeven analysis on the project to determine the minimum occupancy rate required to breakeven on the project. What is the accounting breakeven for the project (roundup nearest unit)?

Answer from the following:

78 units; 21.1% occupancy

103 units; 27.8% occupancy

53 units; 14.3% occupancy

153 units; 41.4% occupancy

128 units; 34.6% occupancy