Reference no: EM133305913
The landlord I rent my apartment from is considering investing in a new building. The land costs $5M which is payable immediately. The building will take two years to build and will cost $20M, of which half will be paid now and half will be paid one year from now. The building will have 100 apartments. The first rental payments will be received at the end of year 3. At any given time, 90% of the apartments are expected to be rented. Rental revenue is expected to be $2000 per occupied apartment per month, payable at the end of the year. One-quarter of the renters are expected to be late with their payments, and will pay one year late. Maintenance is expected to be $200 per apartment per month regardless of occupancy, and will be paid at the end of the year. The landlord already has a legal team that handles their current buildings. The fees for this team are $200,000 per year. If the new building is built, the legal fees will increase to $300,000 per year with the first increased payment at the end of year 3. Several of the apartment furnishings that the new building will require are already available with the landlord, left over from previous apartments. These have a book value of $2M and could be sold right now for $3M. The cost of the new building doesn't include the cost of these furnishings. The building depreciates to zero over ten years after construction is completed. The land does not depreciate. The building is expected to last forever. The tax rate is 40% and the OCC is 12%.
1. What is the revenue in the income statement at the end of year 3?
(a) 180,000
(b) 200,000
(c) 1,620,000
(d) 2,160,000
(e) 2,400,000
2. What is the cost in the income statement at the end of year 3?
(a) 240,000
(b) 340,000
(c) 540,000
(d) 600,000
3. What is the depreciation in the income statement at the end of year 3?
(a) 150,000
(b) 200,000
(c) 2,000,000
(d) 2,500,000
4. If the landlord is forced to sell out at the end of year 4, and has a sale price of $20 million for the building and the property, what is the after-tax cashflow they would receive?
(a) 16,000,000
(b) 18,400,000
(c) 20,000,000
(d) 20,400,000
5. What is the cashflow received from the change in NWC at the end of year 3?
(a) 600,000
(b) 540,000
(c) 50,000
(d) 0
(e) +50,000
(f) +540,000
(g) +600,000
6. What is the opportunity cost of the leftover furnishings at year 0?
(a) 1,800,000
(b) 2,000,000
(c) 2,600,000
(d) 3,000,000
(e) 3,400,000
7. The cashflow at the end of year 13 (11 years after construction is completed) is 1,236,000. What is the fair value of the building at the end of year 12 (after any payments at that time have been received)?
(a) 1,236,000
(b) 10,300,000
(c) 11,536,000
(d) 12,360,000
(e) Cannot be determined