You are considering buying a 500-unit apartment complex in suburban Erindale. The current owner of the

apartment complex is asking for $50 million. Assume the following:

The apartment complex can be fully depreciated over 40 years

On average, each unit produces $24,000 of pre-tax income per year

The vacancy rate in Erindale averages 10%

Operating expenses per unit are $8,000 annually. These expenses are incurred whether or not the

units are occupied.

Income and expenses occur at year-end

Your tax rate is 40% on pre-tax income and 50% on capital gains

Your discount rate is 11%

Real estate prices in the Erindale area have been increasing at 6% per year, and you anticipate that

this rate will continue for the foreseeable future. You anticipate selling the apartment complex at

the end of 10 years.

Part A (12 Marks)

Use the data above to value the apartment complex. Hint: Calculate the NPV.

Part B (3 Marks)

Now suppose that the cash flows from rentals (including expenses and depreciation) occur in mid-year.

Suppose that the resale cash flow of the complex still occurs at the end of 10 years. Recalculate the value of

the apartment complex.