PGI= potential gross income

3. (15 percent) Assume that you are an investment analyst preparing an analysis of an investment opportunity for a client. Your client is considering the acquisition of an apartment complex from a developer at the point in time when the apartments are ready for first occupaney. You have developed the following information. 1) Number of units-36 2) First year market rent per unit $450 per month 3) Rent is projected to increase by 8% each year 4) Annual vacancy rate = 3% of PGI 5) Annual collection loss-2% of PGI 6) Annual operating expense-30% of PGI 7) Miscellaneous yearly income (parking and washers/dryers)- $800 8) Monthly miscellaneous income is expected to remain constant 9) Purchase price $2,000,000 10) Estimated value of land $500,000 11) Anticipated mortgage terms a) Loan to value ratio = .80 b) Interest rate-6% c) Years to maturity 25 d) Points charged 3 e) Prepayment penalty-2% of outstanding balance f) Level payment, fully amortized g) Fixed interest rate, monthly payments 12) Anticipated holding period-4 years property is expected to appreciate during the holding period-5% a year 14) Estimated selling expenses as proportion of future 15) Marginal income tax rate for the client-24% l6) It is assumed that the property is put into service on January 1 sales prices 5% ecember 31st 17) Assume the client is "active" in the property management 18) It is assumed that the client has an adjusted gross income o has no other passive income not offset by other passive losses (for each year f $95,000 and of the anticipated holding period) 19) Client's minimum required before tax rate of return on equity Calculate: a. For the first year of operation the: (1) Overall (cap) rate of return (2) Gross income multiplier (3) After-tax cash flow b. The before-tax net present value. Based on the before-tax net present value, should this investment be considered? Explain