United Residential is a real-estate developer considering a 40-unit apartment complex in a growing college town. As the area is also booming with foreign auto-makers locating their U.S. assembly plants, the firm expects that the apartment complex, once built, will enjoy a 90% occupancy for an extended period. The firm already complied some of the critical financial information related to the development project as follows: • Land price (1 acre) = $1,200,000. • Building (40 units of single bedroom) = $4,800,000. • Project life = 25 years. • Building maintenance per unit per month = $100. • Annual property taxes and insurance = $400,000. Assuming that the land will appreciate at an annual rate of 5%, but the building will have no value at the end of 25 years (it will be torn down and a new structure would be built). Determine the minimum monthly rate that should be charged if a 12% return (or 0.9489% per month) before tax is desired.
United Residential is a real-estate developer considering a 40-unit apartment complex in a growing college town. As the area is also booming with foreign auto-makers locating their U.S. assembly plants, the firm expects that the apartment complex, once built, will enjoy a 90% occupancy for an extended period. The firm already complied some of the critical financial information related to the development project as follows: • Land price (1 acre) = $1,200,000. • Building (40 units of single bedroom) = $4,800,000. • Project life = 25 years. • Building maintenance per unit per month = $100. • Annual property taxes and insurance = $400,000. Assuming that the land will appreciate at an annual rate of 5%, but the building will have no value at the end of 25 years (it will be torn down and a new structure would be built). Determine the minimum monthly rate that should be charged if a 12% return (or 0.9489% per month) before tax is desired.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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United Residential is a real-estate developer considering a 40-unit apartment
complex in a growing college town. As the area is also booming with foreign auto-makers locating
their U.S. assembly plants, the firm expects that the apartment complex, once built, will enjoy a
90% occupancy for an extended period. The firm already complied some of the critical financial
information related to the development project as follows:
• Land price (1 acre) = $1,200,000.
• Building (40 units of single bedroom) = $4,800,000.
• Project life = 25 years.
• Building maintenance per unit per month = $100.
• Annual property taxes and insurance = $400,000.
Assuming that the land will appreciate at an annual rate of 5%, but the building will have no
value at the end of 25 years (it will be torn down and a new structure would be built). Determine
the minimum monthly rate that should be charged if a 12% return (or 0.9489% per month) before
tax is desired.
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