You are considering a luxury apartment building project that requires an investm

Question

You are considering a luxury apartment building project that requires an investment of $1,300,000. The building has 50 unites. We expect that the maintenance cost for the apartment building will be $150,000 in the first year, and to rise to $200,000 in the second year, and to continue to increase by $50,000 in subsequent years. The cost to hire a manager for the building is estimate to be $50,000 per year. After five years of operation, the apartment building can be sold for $800,000. What annual rent per apartment unit will provide a return on investment of 15%? Assume that the building will remain fully occupies during the five years.

Explanation / Answer

For this we have to do the NPV analysis, where

NPV = Present value (PV) of all cash inflows - PV of all cash outflows.

PV of cash outflows isas per calculations below. Note that, a return on investment of 15% means that, if all the cash inflows & outflows are discounted at 15%, NPV will become 0.

PV of Cash outflow =  $2,426,815

PV of cash inflow = PV of rent collected + PV of seilling price after 5 years

$2,426,815  = PV of rent collected + [$800,000 / (1.15)5]

PV of rent collected = $(2,426,815 - 397,741) = $2,029,074

If rent per year be Y, then:

Therefore,

Y x 3.3522 = $2,029,074

Y = $2,029,074 / 3.3522 = $605,296.1

This is the annual rent for total 50 units in the apartment building.

Annual Rent per apartment = $605,296 / 50 = $12,105

Year Cash Outflow Maintenance Cost Supervisor cost Total cash outflow Discount factor Discounted cash outflow 0 1300000 1300000 1 1300000 1 200000 50000 250000 0.8696 217400 2 250000 50000 300000 0.7561 226830 3 300000 50000 350000 0.6575 230125 4 350000 50000 400000 0.5718 228720 5 400000 50000 450000 0.4972 223740 PV of Cash Outflow = 2426815

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.