Question

Evaluate the purchase of an existing 950 unit apartment complex for $12500000, 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 building’s life. Rentals are estimated at 855 units per year. Each unit will be rented for a cumulative monthly amount of $16000 per year. Cost per unit when rented $8000 per year. Fixed costs $3000000 per year for the building, other than the initial investment. Demolition/Clean up $6000000 after-tax. Depreciation is to be straight-line. Assume the project can be financed at 8% (before-tax) using debt. Tax Rate is 30%. Develop a pro forma income statement and compute the after-tax operating cash-flow (OCF).

Group of answer choices

$3000000 to $3200000

$2800000 to $3000000

<$2600000

>$3200000

$2600000 to $2800000

Answer 1

Proforma and statement of income for the project has been given below.

Income statement
Paticulars	Amount	Amount
Revenue		13680000
855 x 16000
Less: Costs
Operating cost 8000 x 855	6840000
Fixed cost	3000000	9840000
Operating Profit		3840000
Less: Dipreciation	625000
12500000/20
Less: Interest	1000000	1625000
12500000 x 8%
Net profit		2215000
Less: Tax @30%		664500
Profit after Tax		1550500

Group of the answer <2600000