Problem:
You are considering purchasing an apartment building. Once you renovate the apartment building you will rent the apartments. You plan to keep the building for 7 years and then sell it at the end of year 7 for the estimated fare market value.
Purchase Price $10,000,000
Renovation Costs $2,500,000
Year 1 MACRS Depreciation Rate 1.3%
Years 2 - 7 MACRS Depreciation Rate 2.6% each year
Tax Rate 40%
Expected Market Value at the end of year 7 $21,400,000
First Year Rental Gross Income $1,500,000
Expected annual increase in gross income 9%
First year operating expenses, excluding depreciation $650,000
Expected annual increase in operating expenses 7%
Cost of Capital 13%
What is the NPV of this project? Should I make this investment?