Reference no: EM133159307

Question - A real estate broker is offering an apartment building for sale that has the following characteristics:

a. The asking price is $3.5M, with land valued at $500,000.

b. The 160 apartment units rent for $450 per month with rent expected to increase by 4% per year starting at year 2.

c. Vacancy and collection loss allowance is 6% of the potential gross income.

d. Operating expenses are expected to be 32% of effective gross income.

e. The real estate agent estimates that the value of the property, net of selling expenses, will be $4.4M at the end of a five-year investment horizon.

f. A 12%, 20-year mortgage for $2M is available with monthly payments.

g. The cost recovery allowance recapture rate is 25%.

h. The investor's ordinary income tax rate is 28%.

i. The investor's capital gain tax rate is 15%.

j. The appropriate discount rate for this investment (required return) is 18%.

Required - Calculate the relevant cash flows for this (IN EXCEL) investment and apply the NPV and IRR rules to decide whether to pursue this project.