Question

10.3 You are considering constructing a luxury apartment building project that requires an investment f $15.500,000, which comprises $12,000,000 for the building and $3,500,000 for land. The building has 50 You expect the maintenance cost for the apart- ment building to be $350,000 the first year and 400.000 the second year, after which it will continue to increase by $50,000 in subsequent years. The cost o hire a manager for the building is estimated to be $85,000 per year. After five years of operation, the apartment building can be sold for $17,000,000 What is the annual rent per apartment unit that will rovide a return on investment of 15% after tax? As- sume that the building will remain fully occupied dur- ing the five years. Assume also that your tax rate is 35%. The building will be depreciated according to 39-year MACRS and will be placed in service in Jan uary during the first year of ownership and sold in December during the fifth year of ownership. 10.16 Refer to the data in Problem 10.3. If the firm expects to borrow the initial investment ($15,500,000) at 10% over five years (paying back the loan in equal annual payments of $4,088,861), determine the pro- ject's net cash flows

Answer 1

10.3)		0	1	2	3	4	5
	Maintenance cost		$        -3,50,000	$       -4,00,000	$        -4,50,000	$        -5,00,000	$        -5,50,000
	Manger's cost		$           -85,000	$           -85,000	$            -85,000	$           -85,000	$           -85,000
	Depreciation %		2.461	2.564	2.564	2.564	2.564
	Depreciation expense (Building $12000000)		$        -2,95,320	$       -3,07,680	$        -3,07,680	$        -3,07,680	$        -3,07,680	$   -15,26,040
	Before tax expenses		$        -7,30,320	$       -7,92,680	$        -8,42,680	$        -8,92,680	$        -9,42,680
	Tax shield on expenses at 35%		$        -2,55,612	$       -2,77,438	$        -2,94,938	$        -3,12,438	$        -3,29,938
	After tax expenses		$        -4,74,708	$       -5,15,242	$        -5,47,742	$        -5,80,242	$        -6,12,742
	Less: Depreciation		$        -2,95,320	$       -3,07,680	$        -3,07,680	$        -3,07,680	$        -3,07,680
	After tax operating cash outflows		$        -1,79,388	$       -2,07,562	$        -2,40,062	$        -2,72,562	$        -3,05,062
	Initial investment:
	Land	$       -35,00,000
	Building	$   -1,20,00,000
	Sale value at EOY 5						$   1,70,00,000	`
	Tax on sale value = (17000000-15500000+1526040)*35% =						$     -10,59,114
	Net cash outflows after tax	$   -1,55,00,000	$        -1,79,388	$       -2,07,562	$        -2,40,062	$        -2,72,562	$   1,56,35,824
	PVIF at 15% [PVIF = 1/1.15^n]	1	0.86957	0.75614	0.65752	0.57175	0.49718	3.35216
	PV at 15%	$   -1,55,00,000	$        -1,55,990	$       -1,56,947	$        -1,57,845	$        -1,55,838	$       77,73,768
	Sum of PV of net outflows	$       -83,52,851
	Annual after tax rent required for 0 NPV = 8352851/3.35216 =	$        24,91,782
	Annual before tax rent required for 0 NPV = 2491782/65% =	$        38,33,511
	Required rent per unit = 3833511/50 =	$              76,670
10.16)		0	1	2	3	4	5
	Rental revenue		$       38,33,511	$       38,33,511	$        38,33,511	$       38,33,511	$       38,33,511
	Maintenance cost		$        -3,50,000	$       -4,00,000	$        -4,50,000	$        -5,00,000	$        -5,50,000
	Manger's cost		$           -85,000	$           -85,000	$            -85,000	$           -85,000	$           -85,000
	Depreciation %		2.461	2.564	2.564	2.564	2.564
	Depreciation expense (Building $12000000)		$        -2,95,320	$       -3,07,680	$        -3,07,680	$        -3,07,680	$        -3,07,680
	Interest expense		$     -15,50,000	$     -12,96,114	$      -10,16,839	$        -7,09,637	$        -3,71,715
	NOI		$       15,53,191	$       17,44,717	$        19,73,992	$       22,31,194	$       25,19,116
	Tax at 35%		$         5,43,617	$         6,10,651	$          6,90,897	$         7,80,918	$         8,81,691
	NOPAT		$       10,09,574	$       11,34,066	$        12,83,095	$       14,50,276	$       16,37,426
	Add: Depreciation		$         2,95,320	$         3,07,680	$          3,07,680	$         3,07,680	$         3,07,680
	OCF		$       13,04,894	$       14,41,746	$        15,90,775	$       17,57,956	$       19,45,106
	Loan receipt	$     1,55,00,000
	Principal repayment		$     -25,38,861	$     -27,92,747	$      -30,72,022	$     -33,79,224	$     -37,17,146
	Initial investment:
	Land	$       -35,00,000
	Building	$   -1,20,00,000
	Sale value at EOY 5						$   1,70,00,000
	Tax on sale value = (17000000-15500000+1526040)*35% =						$     -10,59,114
	Net cash outflows after tax	$                        -	$     -12,33,967	$     -13,51,001	$      -14,81,247	$     -16,21,268	$   1,41,68,845
	LOAN AMORTIZATION:
	Beginning balance of loan		$   1,55,00,000	$   1,29,61,139	$    1,01,68,392	$       70,96,370	$       37,17,146
	Interest		$       15,50,000	$       12,96,114	$        10,16,839	$         7,09,637	$         3,71,715
	Total		$   1,70,50,000	$   1,42,57,253	$    1,11,85,231	$       78,06,007	$       40,88,861
	Installment		$       40,88,861	$       40,88,861	$        40,88,861	$       40,88,861	$       40,88,861
	Ending balance		$   1,29,61,139	$   1,01,68,392	$        70,96,370	$       37,17,146	$                      -
	Principal repaid		$       25,38,861	$       27,92,747	$        30,72,022	$       33,79,224	$       37,17,146	$ 1,55,00,000