Suppose that you are considering an investment in an apartment building. The specifics are:

a) The building is five years old, has a 90 percent occupancy rate, and has an expected useful life of 30 years.

Assume that this occupancy rate is expected to continue for the life of the building.

b) There are 120 2-bedroom units, 100 1-bedroom units, and 60 studios.

c) The 2-bedroom units rent for $3000 per month, the 1-bedroom units for $2000 per month, and the studios for $900 per month.

d) Current rent control laws will prevent the rents from ever being raised.

e) The estimated annual maintenance cost for the building is $1200000 per year (this is independent of the number of apartments rented).

f) There is an additional estimated maintenance cost at $245 per unit per month, when each unit is rented.

g) There will be no salvage value to the building in 30 years, but it is estimated that it will cost 5 million dollars at that time to demolish the building as will be required in the purchase contract. (You are not purchasing the land. You will have a 30-year lease of the land, which is paid for in the purchase of the building.)

h) The asking price of the building is $35 million.

i) The tax-rate is 35%, and assume the building will be fully depreciated over its useful life.

1. Develop the pro-forma income statement, compute the Operating Cash-Flows, and determine whether you should make this investment if you require a 9% (after-tax) return on investments like this.

2. Assume that your bossy boss wants you to do a sensitivity analysis regarding the project. He is concerned that the vacancy rate may increase by as much as 5% (occupancy will go down to 85%). Compute the NPV for this scenario (round to nearest $10,000).

3. Analyze the situation where both rents and occupancy decline by 5%. Compute the NPV for this new scenario (round to nearest $10,000).

4. Conduct a financial (NPV) breakeven analysis on the project to determine the minimum occupancy rate required to breakeven on the project. What is the accounting breakeven for the project (roundup nearest unit)?

5. What is the OCF breakeven for the project (roundup nearest unit)?

6. Using original assumptions, calculate the after-tax IRR and before-tax IRR.