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    NPV to buy Complex Apartment

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    Jeff Robinson is a real estate developer who specializes in residential apartments.
    A complex of 40 run-down apartments has recently come on the market for $645,500.
    Robinson predicts that after remodeling, the 20 one-bedroom units will rent for $500 per
    month and the 20 two-bedroom apartments for $600. He budgets 20% of the rental fees for
    repairs and maintenance. It should be 30 years before the apartments need remolding again, if
    the work is done well. Remodeling costs are $12,000 per apartment. Both purchase price and
    remodeling costs qualify as 27.5-year MACRS property.
    Assume that the MACRS schedule assigns an equal amount of depreciation to each of the first
    27 years and one-half year to year 28. Robinson 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 12th year.
    His predicted sale price is $2,000,000. Robinson's after-tax required rate of return is 10%, and
    his tax rate is 35%.
    Should Robinson buy the apartment complex? What is the after-tax NPV? Ignore tax
    complications, such as capital gains.

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    Solution Summary

    The solution computes the NPV whether to buy complex apartment or not. The after-tax required rate of return is determined. The depreciation of a MACRS property is found.