Question

Evaluate the purchase of an existing 1050 unit apartment complex for $15000000, the building is assumed to have a 20 year functional life. Treat the rents as being collected at the end of each year, along with associated variable and fixed costs. Assume rent controls will prohibit the rent from being raised over the life of the building. Assume that the underlying property reverts to the original owners at the end of twenty years, and that you will also be responsible for demolition and clean-up costs, to be incurred at the end of the building’s life. Rentals are estimated at 945 units per year. Each unit will be rented for a cumulative monthly amount of $15000 per year. Cost per unit when rented $9000 per year. Fixed costs $2000000 per year for the building, other than the initial investment. Demolition/Clean up $8500000 after-tax. Depreciation is to be straight-line. Assume the project can be financed at 7% (before-tax) using debt. Tax Rate is 35%. If P is the rental price, which is the equation for EBIT in terms of P?                                       

Group of answer choices

none of them

945P-10505000

614.25P-10505000                                                     

945P-11255000

614.25P-11255000

Answer 1

Variable operating cost (9000*945)	8,505,000
Fixed operating cost	2,000,000
Total operating cost	10,505,000
Rental price per room	P
Multiply: units rented	945
Sales	945P
Sales	945P
Less: Total operating cost	10,505,000
Eearnings before interest and tax [EBIT]	945P - 10,505,000
EBIT in terms of P	945P-10505000