Suppose that you are considering an investment in an apartment building. The spe
ID: 2574022 • Letter: S
Question
Suppose that you are considering an investment in an apartment building. The specifics are The building is five years old, has a 90 percent occupancy rate, and has an expected useful life of 30 years a) Assume that this occupancy rate is expected to continue for the life of the building b) There are 120 2-bedroom units, 100 1-bedroom units, and 60 studios. The 2-bedroom units rent for $3000 per month, the 1-bedroom units for $2000 per month, and the c) studios for $900 per month d) Current rent control laws will prevent the rents from ever being raised The estimated annual maintenance cost for the building is $1200000 per year (this is independent of the e) number of apartments rented) f) There is an additional estimated maintenance cost at $245 per unit per month, when each unit is rented There will be no salvage value to the building in 30 years, but it is estimated that it will cost 5 million dollars at that time to demolish the building as will be required in the purchase contract. (You are not g) purchasing the land. You will have a 30-year lease of the land, which is paid for in the purchase of the building.) The asking price of the building is $35 million. i) h) The tax-rate is 35%, and assume the building will be fully depreciated over its useful life. Develop the pro-forma income statement, compute the Operating Cash-Flows, and determine whether you should make this investment if you require a 9% (after-tax) return on investments like this. A MAYBE; NPV between -220000 and 280000 B YES; NPV between 1280000 and 1780000 C YES; NPV between 280000 and 780000 D YES; NPV greater than 1780000 E YES; NPV between 780000 and 1280000 Assume that your bossy boss wants you to do a sensitivity analysis regarding the project. He is concerned that the vacancy rate may increase by as much as 5% (occupancy will go down to 85%). Compute the NPV for this scenario (round to nearest $10,000) A ($1,910,000) B ($1,960,000) C ($1,860,000) D ($1,810,000) E ($2,010,000) 6Explanation / Answer
Calculation of Rent
UNITS
NUMBER
RENT PER UNIT
MONTHS
TOTAL RENT
2 bedroom
120
3000
12
4320000
1 bedroom
100
2000
12
2400000
studio
60
900
12
648000
280
7368000
Caclulation of additional maintenance cost
Total units
280
Average occupancy rate
90%
Average occupied units
252
Average cost per month per unit
245
Annual cost for all rented units
740880
OPERATING PROFIT AND CASH FLOW CALCULATION
90% of it will be rented hence
6631200
-Annual Maintenance cost
-1200000
-Additional maintenance cost
-740880
Inflow before depreciation and tax
4690320
depreciation 35000000/30 years
1166667
Operating profit before tax
3523653
tax @ 35%
1233278.67
Operating profit after tax
2290375
Cash inflow after tax for 30 years
3457041
CALCULATION OF NET PRESENT VALUE
PARTICULARS
CASH FLOW
PERIOD
NPV RATE OF 9%
NPV
INITIAL COST
35000000
0
1.0000
-35000000
ANNUAL INCOME
3457041
01-30
10.2737
35516605.5
COST OF DEMOLISHING
5000000
30TH
0.0754
-376850
139755.546
SINCE NPV IS POSITIVE IT INDICATES RETURN ON INVESTMENT IS MORE THAN 9%. HENCE IT IS WORTH INVESTING IN THIS PROJECT.
(ii) WHEN OCCUPANCY GOES TO 85%
Calculation of Rent
UNITS
NUMBER
RENT PER UNIT
MONTHS
TOTAL RENT
2 bedroom
120
3000
12
4320000
1 bedroom
100
2000
12
2400000
studio
60
900
12
648000
280
7368000
Caclulation of additional maintenance cost
Total units
280
Average occupancy rate
85%
Average occupied units
238
Average cost per month per unit
245
Annual cost for all rented units
699720
OPERATING PROFIT AND CASH FLOW CALCULATION
85% of it will be rented hence
6262800
-Annual Maintenance cost
-1200000
-Additional maintenance cost
-699720
Inflow before depreciation and tax
4363080
depreciation 35000000/30 years
1166667
Operating profit before tax
3196413
tax @ 35%
1118744
Operating profit after tax
2077669
Cash inflow after tax for 30 years
3244335
CALCULATION OF NET PRESENT VALUE
PARTICULARS
CASH FLOW
PERIOD
NPV RATE OF 9%
NPV
INITIAL COST
35000000
0
1.0000
-35000000
ANNUAL INCOME
3244335
01-30
10.2737
33331327.9
COST OF DEMOLISHING
5000000
30TH
0.0754
-376850
-2045522.1
HERE NPV IS NEGATIVE WHICH MEANS THIS WOULD NOT FETCH 9% INVESTMENT.
HENCE NOW WE CANNOT INVEST.
(iii) WHEN BOTH NPV AND RENT FALLS BY 5%
Calculation of Rent
UNITS
NUMBER
RENT PER UNIT
MONTHS
TOTAL RENT
2 bedroom
120
2850
12
4104000
1 bedroom
100
1900
12
2280000
studio
60
855
12
615600
280
6999600
Caclulation of additional maintenance cost
Total units
280
Average occupancy rate
85%
Average occupied units
238
Average cost per month per unit
245
Annual cost for all rented units
699720
OPERATING PROFIT AND CASH FLOW CALCULATION
85% of it will be rented hence
5949660
-Annual Maintenance cost
-1200000
-Additional maintenance cost
-699720
Inflow before depreciation and tax
4049940
depreciation 35000000/30 years
1166667
Operating profit before tax
2883273
tax @ 35%
1009145.67
Operating profit after tax
1874128
Cash inflow after tax for 30 years
3040794
CALCULATION OF NET PRESENT VALUE
PARTICULARS
CASH FLOW
PERIOD
NPV RATE OF 9%
NPV
INITIAL COST
35000000
0
1.0000
-35000000
ANNUAL INCOME
3040794
01-30
10.2737
31240208.7
COST OF DEMOLISHING
5000000
30TH
0.0754
-376850
-4136641.3
HERE NPV IS NEGATIVE WHICH MEANS THIS WOULD NOT FETCH 9% INVESTMENT.
HENCE NOW WE CANNOT INVEST.
Calculation of Rent
UNITS
NUMBER
RENT PER UNIT
MONTHS
TOTAL RENT
2 bedroom
120
3000
12
4320000
1 bedroom
100
2000
12
2400000
studio
60
900
12
648000
280
7368000
Caclulation of additional maintenance cost
Total units
280
Average occupancy rate
90%
Average occupied units
252
Average cost per month per unit
245
Annual cost for all rented units
740880
OPERATING PROFIT AND CASH FLOW CALCULATION
90% of it will be rented hence
6631200
-Annual Maintenance cost
-1200000
-Additional maintenance cost
-740880
Inflow before depreciation and tax
4690320
depreciation 35000000/30 years
1166667
Operating profit before tax
3523653
tax @ 35%
1233278.67
Operating profit after tax
2290375
Cash inflow after tax for 30 years
3457041
CALCULATION OF NET PRESENT VALUE
PARTICULARS
CASH FLOW
PERIOD
NPV RATE OF 9%
NPV
INITIAL COST
35000000
0
1.0000
-35000000
ANNUAL INCOME
3457041
01-30
10.2737
35516605.5
COST OF DEMOLISHING
5000000
30TH
0.0754
-376850
139755.546
SINCE NPV IS POSITIVE IT INDICATES RETURN ON INVESTMENT IS MORE THAN 9%. HENCE IT IS WORTH INVESTING IN THIS PROJECT.
(ii) WHEN OCCUPANCY GOES TO 85%
Calculation of Rent
UNITS
NUMBER
RENT PER UNIT
MONTHS
TOTAL RENT
2 bedroom
120
3000
12
4320000
1 bedroom
100
2000
12
2400000
studio
60
900
12
648000
280
7368000
Caclulation of additional maintenance cost
Total units
280
Average occupancy rate
85%
Average occupied units
238
Average cost per month per unit
245
Annual cost for all rented units
699720
OPERATING PROFIT AND CASH FLOW CALCULATION
85% of it will be rented hence
6262800
-Annual Maintenance cost
-1200000
-Additional maintenance cost
-699720
Inflow before depreciation and tax
4363080
depreciation 35000000/30 years
1166667
Operating profit before tax
3196413
tax @ 35%
1118744
Operating profit after tax
2077669
Cash inflow after tax for 30 years
3244335
CALCULATION OF NET PRESENT VALUE
PARTICULARS
CASH FLOW
PERIOD
NPV RATE OF 9%
NPV
INITIAL COST
35000000
0
1.0000
-35000000
ANNUAL INCOME
3244335
01-30
10.2737
33331327.9
COST OF DEMOLISHING
5000000
30TH
0.0754
-376850
-2045522.1
HERE NPV IS NEGATIVE WHICH MEANS THIS WOULD NOT FETCH 9% INVESTMENT.
HENCE NOW WE CANNOT INVEST.
(iii) WHEN BOTH NPV AND RENT FALLS BY 5%
Calculation of Rent
UNITS
NUMBER
RENT PER UNIT
MONTHS
TOTAL RENT
2 bedroom
120
2850
12
4104000
1 bedroom
100
1900
12
2280000
studio
60
855
12
615600
280
6999600
Caclulation of additional maintenance cost
Total units
280
Average occupancy rate
85%
Average occupied units
238
Average cost per month per unit
245
Annual cost for all rented units
699720
OPERATING PROFIT AND CASH FLOW CALCULATION
85% of it will be rented hence
5949660
-Annual Maintenance cost
-1200000
-Additional maintenance cost
-699720
Inflow before depreciation and tax
4049940
depreciation 35000000/30 years
1166667
Operating profit before tax
2883273
tax @ 35%
1009145.67
Operating profit after tax
1874128
Cash inflow after tax for 30 years
3040794
CALCULATION OF NET PRESENT VALUE
PARTICULARS
CASH FLOW
PERIOD
NPV RATE OF 9%
NPV
INITIAL COST
35000000
0
1.0000
-35000000
ANNUAL INCOME
3040794
01-30
10.2737
31240208.7
COST OF DEMOLISHING
5000000
30TH
0.0754
-376850
-4136641.3
HERE NPV IS NEGATIVE WHICH MEANS THIS WOULD NOT FETCH 9% INVESTMENT.
HENCE NOW WE CANNOT INVEST.
THE BREAKEVEN OCCUPANCY RATE WOULD BE 89.6% THAT IS 251 UNITS.Related Questions
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