Question

An apartment building in your neighborhood is for sale for $140,000. The building has four units, which are rented at $500 per month per unit. The tenants have long-term leases that expire in 5 years. Maintenance and other expenses for upkeep are $8000 annually. A new university is being built in the vicinity and it is expected that the building could be sold for $160,000 after 5 years. Part 1: What is the IRR for this investment? Part 2: Should the investment be accepted if you have a MARR of 12%?

Answer 1

1) IRR = 13.61%

2) Since the NPV is positive ($8,464.72), the project should be accepted.

Step-by-step explanation:

initial investment = -$140,000

NCF years 1 to 4 = ($500 x 4 x 12) - $8,000 = $16,000

NCF year 5 = $16,000 + $160,000 = $176,000

using a financial calculator, the IRR = 13.61%

if the discount rate is 12%, then the project's NPV is:

NPV = -$140,000 + $16,000/1.12 + $16,000/1.12² + $16,000/1.12³ + $16,000/1.12⁴ + $176,000/1.12⁵ = $8,464.72