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Evaluate the purchase of an existing 1300 unit apartment complex for $7000000, the building is assumed to
have a 20 year 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 from being raised over the life of the
building. Assume that the underlying 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 buildings
life.
- Rentals are estimated at 1170 units per year
- Each unit will be rented for a cumulative monthly amount of $9000 per year ($9000 monthly cumulative for 12 months = 1 year)
- Cost per unit when rented $6000 per year
- Fixed costs $600000 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 9% (before-tax) using debt
- Tax Rate is 35%
Develop a pro forma income statement and compute the after-tax operating (NOPAT) cash-flow.
1 What is the breakeven OCFs?
2 What is the accounting breakeven rents by varying units?
3 What would the effect be on the breakeven rent if MACRS is used instead of the straight-line depreciation?
How about on the accounting breakeven rents?
4 If variable costs remain at $6000 per unit; number of units rentable are 1170, what should the breakeven
rental price be?
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