Question
Multiple choice question: Suppose that you are considering an investment in an apartment building.The specifics are: - The building is three years old, has a
Multiple choice question:
Suppose that you are considering an investment in an apartment building.The specifics are:
- The building is three years old, has a 80 percent occupancy rate, and has an expected useful life of 25 years. Assume that this occupancy rate is expected to continue for the life of the building.
- There are 120 2-bedroom units, 100 1-bedroom units, and 60 studios.
- The 2-bedroom units rent for $2500 per month, the 1-bedroom units for $1800 per month, and the studios for $1200 per month.
- Current rent control laws will prevent the rents from ever being raised.
- The estimated annual maintenance cost for the building is $900000 per year (this is independent of the number of apartments rented).
- There is an additional estimated maintenance cost at $150 per unit per month, when each unit is rented.
- There will be no salvage value to the building in 25 years, but it is estimated that it will cost 4 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 25-year lease of the land, which is paid for in the purchase of the building.)
- The asking price of the building is $28 million.
- The tax-rate is 30%, and assume the building will be fully depreciated over its useful life.
- The WACC is 9%.
Develop the pro-forma income statement, compute the Operating Cash-Flows and NPV. Determine whether you should make this investment if you require a 9% (after-tax) return on investments like this.
possible answers are:
YES; NPV between 2460000 and 2960000
YES; NPV between 2960000 and 3460000
YES; NPV between 1460000 and 1960000
YES; NPV between 1960000 and 2460000
YES; NPV greater than 3460000
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started