\"You are considering an apartment building project that requires an investment
ID: 2512780 • Letter: #
Question
"You are considering an apartment building project that requires an investment of $11,500,000. The building has 100 units. You expect the maintenance cost for the apartment building to be $300,000 in the first year and $320,000 in the second year, after which it will continue to increase by $20,000 in subsequent years. The cost to hire a manager for the building is estimated to be $80,000 per year. After five years of operation, the apartment building can be sold for $19,000,000. What is the annual rent per apartment unit that will provide a return on investment of 18% after tax? Assume that the building will remain fully occupied during the five years. Assume also that your regular tax rate is 35% and the capital gains tax rate is 17.5%. The building has a CCA rate of 4% and will be sold at the end of the fifth year ofow nership."Explanation / Answer
Statement Showing Calculation of Annual Lease Rent Particular Amount Time PVF @18% Present Value Cash outflow Investment made in Buiding Project $11,500,000 0 1 $11,500,000 Annual Maintainance Cost( Net of Tax) $195,000 1 0.847 $165,165 $208,000 2 0.718 $149,344 $221,000 3 0.609 $134,589 $234,000 4 0.516 $120,744 $247,000 5 0.437 $107,939 Annual Supervisor Cost( Net of Tax) $52,000 1-5 3.127 $162,604 Present Value of Cash Outflow $12,340,385 Cash Inflow Annual Rent ( Net of Tax) 0.65X 1-5 3.127 2.033X Tax Saving on Depreciation $161,000 1 0.847 $136,367 $154,560 2 0.718 $110,974 $148,378 3 0.609 $90,362 $142,442 4 0.516 $73,500 $136,745 5 0.437 $59,757 Residual Value of Building $7,939,152 5 0.437 $3,469,409 Prsent Value of Cash inflow 3940370+2.033X PVCI= PVCO $12340385=$3940370+2.033X Annual rent of Building (X)= $4131832 Annual Rent of Apartment ($4131832/100)=$41318.32 Computation of Tax Saving on Depreciation Terminal Value Depreciation Tax Saving on Depreciation Particular Amount 460000 $161,000 Investment Cost $11,500,000 $441,600 $154,560 Less: Deprection $2,123,214 $423,936 $148,378 Book Value $9,376,786 $406,979 $142,442 Sale Value $19,000,000 $390,699 $136,745 Capital Gain $9,623,214 Less: Capital Gain Tax $1,684,062 Net Residual Value $7,939,152
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