You are considering a luxury apartment building project that requires an investment of $15,500,000, which comprises $12,000,000 for the building and $3,500,000 for land

You are considering a luxury apartment building project that requires an investment of $12,500,000. The building has 50 units. You expect the maintenance cost for the apartment building to be $250,000 the first year and $300,000 the second year. The maintenance cost will continue to increase by $50,000 in subsequent years. The cost to hire a manager for the building is estimated to be $80,000 per year. After five years of operation, the apartment building can be sold for $14,000,000. What is the annual rent per apartment unit that will provide a return on investment of 15%? Year Initial Investment Maintenance Cost Manager's cost Salvage Value Net Cash flow Discount Factor @ 15% Discounted Amount 0 (12,500,000) (12,500,000) 1 (12,500,000) 1 (250,000) (80,000) (330,000) 0.870 (286,957) 2 (300,000) (80,000) (380,000) 0.756 (287,335) 3 (350,000) (80,000) (430,000) 0.658 (282,732) 4 (400,000) (80,000) (480,000) 0.572 (274,442) 5 (450,000) (80,000) 14,000,000 13,470,000 0.497 6,696,971 Present Value of Cash flows (6,934,494) Inflows required = Present Value of Cash flows / Discount factors 15% for 5 years Inflows required = 6934494/3.352 Inflows required = $ 2,068,667.42 Proof : Year Initial Investment Maintenance Cost Manager's Can cost up to $300,000.