Evaluate the purchase of an existing 1500-unit apartment complex for 7500000, the building is assumed to have a 20 years’ functional life. treat the rents as being collected at the end of each year, along with associated variable and fixed costs. assume rent controls will prohibit the rent form being raised over the life of the building. Assume that the underling property reverts to the original owners at the end of twenty years, and that you will also be responsible for demolition and clean up costs, to be incurred at the end of the building’s life.
~ rentals are estimated at 1350 units per year
~each unit will be rented for a cumulative monthly amount of $6000 per year
~ fixed costs$1000000 per year for the building, other than the initial investment.
~demolition/ clean up$5000000 after-tax
~depreciation is to be straight line
~assume the project can be financed at 15%( before-tax) using debt
~Tax Rate is 35%
10 Assume the same $7500000 initial investment, $900000 after –tax OCF and $5000000 after-tax exit cost. Suppose your company uses the payback rule to evaluate investments. If the allowed payback period is 12 years, what decision dose the rules indicate?
A. Invest
B. Reject
12: suppose you company evaluates projects on a 12-year payback period. what is your decision if you use the discounted payback rule, what would your decision be? (before tax discount rate is 13%)
A. Invest
B. Reject
13: suppose you company evaluates projects on a 8- year payback period. What is your decision if you use the discounted payback rule, what would your decision be? (before tax discount rate is 13%)
A. Invest
B. Reject
14 compute the MIRR assuming the OFC’S will be reinvested to earn a rate of 14%, given a WACC OF 13%.
A. >15%
B. 14%-15%
C. 13%-14%
D. 12%-13%
E. <12%
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