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