Aaron Hersch is a real estate developer who specializes in residential apartments. A complex of 20 run-down apartments has recently come on the market for $332,500. Hersch predicts that after remodeling, the 12 one-bedroom units will rent for $380 per month and the 8 two-bedroom apartments for $440. He budgets 15% of the rental fees for repairs and maintenance. It should be 30 years before the apartments need remodeling again, if work is done well. Remodeling costs are $15,000 per apartment. Both purchase price and remodeling cost qualifies 27.5-year MACRS property.
Assume that the MACRS schedule assigns an equal amount of depreciation to each of the first 27 years and ½ year-to-year 28. The PV at 10% of $1 of cost recovery spread over the 28 years in this way is $0.3372.
Hersch does not believe he will keep the apartment complex for its entire 30-year life. Most likely he will sell it just after the end of the tenth year. His predicted sales price is $980,000.
Hersch’s after-tax required rate of return is 10% and his tax rate is 38%.
What is the NPV after Taxes? Ignore capital gains