Multiple choice question:

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

- The building is four years old, has a 85 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 130 2-bedroom units, 100 1-bedroom units, and 70 studios.

- The 2-bedroom units rent for $2800 per month, the 1-bedroom units for $2000 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 $1500000 per year (this is independent of the number of apartments rented).

- There is an additional estimated maintenance cost at $200 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 6 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 $30 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. Assume that your bossy boss wants you to perform sensitivity analysis regarding the project.He is concerned that the vacancy rate mayincrease by as much as 5% (occupancy will go down to 80%). Compute the NPV for this scenario (round to nearest $10,000).

Answer from the following:

$1,600,000

$1,550,000

$1,650,000

$1,500,000

$1,450,000