Question

An apartment building in your neighborhood is for sale for $140,000. The building has four units, which are rented for $500 per month each. The tenants have long-term leases that expire in 5 years. Maintenance and other expenses for care and upkeep are $8,000 annually. A new shopping mall is being built in the vicinity and it is expected that the building could be sold for $160,000 after 5 years.

(a) If your company plans to purchase this building, what is the rate of return for this investment?

(b) Should this investment be accepted if your other options have a rate of return of 12%?

Answer 1

A) Rate of return (ROR) = (Ending value of Investment - beginning value of investment / begining value of investment ) ​×100%

Ending value of investment   = rent of buiding for 5 years + selling price of building after 5 years - maintanance charge for 5 years

= (500x 4 x 12 x 5) + 160000 - 8000 x 5

= 120000 + 160000 - 40000

= $ 240000

ROR for 5 years = (  240000 - 140000 / 140000) x 100

= 71.43 %

b) The above investment should be accepted because it has a rate of return of 71.43% which is very high compared to 12% ROR