Evaluate the purchase of an existing 1000 unit apartment complex for $4,800,000. 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 buildings life.
Rentals are estimated at 900 units per year
Each unit will be rented for a cumulative monthly amount of $7,000 per year
Cost per unit when rented $4,600 per year
Fixed costs $300,000 per year for the building, other than the initial investment
Demolition / clean up $3,500,000 after tax
Depreciation is to be straight-line
Assume the project can be financed at 11% (before tax) using debt
Tax rate is 35%
Develop a pro forma income statement and compute the after tax operating cash flow
A) Suppose your after-tax OCF is $1,800,000. What is the IRR?
B) What is the IRR before tax?
C) Compute the MIRR assuming the OCF’s will be reinvested to earn a rate of 15%, given a WACC of 13%