Required information Problem 12-58 MACRS Depreciation and Capital Budgeting Analysis; Spreadsheet Application; Sensitivity Analysis (LO 12-1, 12-4, 12-5) [The following information applies to the questions displayed below.) You and your spouse have recently inherited money from a distant relative and are considering a number of investment opportunities, one of which would involve residential real estate. Specifically, you have an opportunity to purchase an apartment complex with 25 rental units. The total price for these units, including sales commission expense, is estimated as $500,000. You estimate that to make each unit suitable for renting, average remodeling costs of $20,000 per unit would be needed. Fifteen of the units have a single bedroom and rent for $500 per month; the remaining units contain two bedrooms and rent for $650 per month. A friend of yours who is in the business suggests that ordinary maintenance and repair costs be budgeted, annually, at 16% of rental revenue. Both the purchase price of the units and the remodeling costs qualify as 27.5-year MACRS property. In terms of calculating depreciation expense for tax purposes, you can assume that MACRS-based deductions for the first 27 years will be the same; in year 28, one-half year of depreciation will be deducted. The present value of MACRS-based depreciation deductions can be found by multiplying the following three items: depreciable cost of the asset, tax rate (t), and PV depreciation factor (at 8%, 0.33588; at 10%, 0.39851; at 12%, 0.28828). If the remodeling is undertaken and annual maintenance is done as scheduled, the investment should last at least 30 years. The estimated net salvage value of the investment 30 years from now is $0. Assume, initially, an opportunity cost of capital of 10% for purposes of evaluating this investment proposal. You and your spouse feel that your combined income tax rate for the foreseeable future would be approximately 40%. Part 1 Required: 1. What is the estimated NPV of this proposed investment? (Hints: As noted above, at a discount rate of 10%, the present value of MACRS-based depreciation deductions for 27.5-year property is equal to the product of the tax rate (t), the initial investment outlay, and 0.33588. For other present value calculations, use the appropriate present value annuity factor for 10%, 30 years found in Appendix C, Table 2 (that is, 9.427).) 2. What would the estimated NPV be if the discount rate were 8% rather than 10%? (Hint. The present value of MACRS-based depreciation deductions for the property in question equals the product of the tax rate (t), the depreciable cost of the asset, and 0.39851.) The present value annuity factor for 8%, 30 years (Appendix C, Table 2) is 11.258. 3. What would the estimated NPV be if the discount rate were 12% rather than 10%? (Hint. The present value of MACRS-based depreciation deductions for the property in question equals the product of the tax rate (t), the depreciable cost of the asset, and 0.28828.) The present value annuity factor for 12%, 30 years (Appendix C, Table 2) is 8.055. (For all requirements, Negative amount should be indicated by a minus sign. Round your answer to the nearest whole dollar amount.) X Answer is complete but not entirely correct. 1. Estimated NPV at a discount rate of 10% $ 2. Estimated NPV at a discount rate of 8% (66,917) X 113,162 X (202,118) X 3. Estimated NPV at a discount rate of 12% $ TABLE 2 Present Value of Annuity of $1 7% 8% 9% 10% 11% 12% 13% 14% 15% 20% 25% 30% Periods 4% 5% 6% 1 0.962 0.952 0.943 2 1.886 1.859 1.833 3 2.775 2.723 2.673 0.935 0.926 0.917 0.909 0.901 0.893 0.585 0.877 0.870 0.333 0.500 0.769 1.SOS 1.783 1.759 1.736 1.713 1.690 1.665 1.647 1.626 1.528 1.440 1.361 2.624 2.577 2.531 2.487 2.444 2.402 2.361 2.322 2.283 2.106 1.952 1.816 3.387 3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.589 2.362 2.166 4.100 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 2.991 2.689 2.436 4. 3.630 3.546 3.465 5 4.452 4.329 4.212 6 5.242 5.076 4.917 4.767 7 6.002 5.786 5.552 5.389 4.623 4.486 4.355 4.231 4.111 3.999 3.889 3.784 3.326 2.951 2.643 5.206 5.033 4.86S 4.712 4.564 4.423 4.285 4.160 3.605 3.161 2.802 5.747 5.535 5.335 5.146 4.96S 4.799 4.639 4.487 3.837 3.329 2.925 S 6.733 6.463 6.210 5.971 9 7.435 7.105 6.802 6.515 6.247 5.995 5.759 5.537 5.328 5.132 4.946 4.772 4.031 3.463 3.019 6.710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.192 3.571 3.092 10 8.111 7.722 7.360 7.024 11 8.760 8.306 7.887 7.499 7.139 6.805 6.495 6.207 5.939 5.687 5.453 5.234 4.327 3.656 3.147 12 9.355 S.563 8.384 7.943 7.536 7.161 6.814 6.492 6.194 5.915 5.660 5.421 4.439 3.725 3.190 13 9.986 9.394 8.853 8.358 7.904 7.487 7.103 6.750 6.424 6.122 5.542 5.583 4.533 3.780 3.223 7.786 7.367 6.982 6.628 6.302 6.002 5.724 4.611 3.824 3.249 14 10.563 9.899 9.295 8.745 8.244 15 11.118 10.350 9.712 9.10S 8.559 16 11.652 10.838 10.106 9.447 8.851 8.061 7.606 7.191 6.311 6.462 6.142 5.347 4.675 3.359 3.268 8.313 7.824 7.379 6.974 6.604 6.265 5.954 4.730 3.887 3.283 8.544 3.022 7.549 7.120 6.729 6.373 6.047 4.775 3.910 3.295 17 12.166 11.274 10.477 9.763 9.122 18 12.659 11.690 10.82S 10.059 9.372 5.756 3.201 7.702 7.250 6.540 6.467 6.128 4.812 3.928 3.304 19 13.134 12.085 11.158 10.336 9.604 20 13.590 12.462 11.470 10.594 9.818 8.950 8.365 7.839 7.366 6.938 6.550 6.198 4.843 3.942 3.311 9.129 8.514 7.963 7.469 7.025 6.623 6.259 4.870 3.954 3.316 9.442 8.772 S.176 7.645 7.170 6.743 6.359 4.909 3.970 3.323 22 14.451 13.163 12.042 11.061 10.201 24 15.247 13.799 12.550 11.469 10.529 9.707 8.985 3.343 7.784 7.283 6.835 6.434 4.937 3.981 3.327 25 30 15.622 14.094 12.783 11.654 10.675 9.823 9.077 8.422 7.543 7.330 6.873 6.464 4.948 3.985 3.329 17.292 15.372 13.765 12.409 11.258 10.274 9.427 8.694 8.055 7.496 7.003 6.566 4.979 3.995 3.332 18.665 16.374 14.498 12.948 11.655 10.567 9.644 8.855 8.176 7.586 7.070 6.617 4.992 3.999 3.333 19.793 17.159 15.046 13.332 11.925 10.757 9.779 5.951 8.244 7.634 7.105 6.642 4.997 3.999 3.333 35 40 Note: The present value (PV) annuity factor for N periods and a rate of r per period = [1 (1+r)-M=r. For example, for N=5 and r=0.10, the PV annuity factor = 3.791 (rounded)