You are considering a luxury apartment building project that requires an investm

Question

You are considering a luxury apartment building project that requires an investment of $12,500,000. You expect the maintenance cost for the apartment building to be $250,000 the first year and $300,000 the second year, after which it will continue to increase by $50,000 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 $14,000,000. Assume a return on investment of 15% after tax. 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 of ownership. If the firm expects to borrow the initial investment ($12,500,000) at 9% over five years (paying back the loan in equal annual payments of $3,213,656),determine the project’s net cash flows.

Explanation / Answer

We are given with EMI let us first calculate Repayment schedule

Now let us calculate depreciation

Statement showing salvage value

Statement showing NPV

Towards Year Opening value EMI Principal Interest @ 9% Closing balance 1 12500000 3213656 2088656 1125000 10411344 2 10411344 3213656 2276635 937021 8134708.96 3 8134708.96 3213656 2481532 732124 5653176.766 4 5653176.766 3213656 2704870 508786 2948306.675 5 2948306.675 3213656 2948306 265348 0

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