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An entrepreneur is considering a new project consisting of an apartment building with 50 units. Each...

An entrepreneur is considering a new project consisting of an apartment building with 50 units. Each unit can be rented for $950/month. It is expected to have an average vacancy rate of 8%. Net operating expenses are budgeted as 30% of the project's gross annual income. What would be the economic value of this project using a cap rate of 8.3%?

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ANSWER

Number of units 50
Rent per unit per month $ 950
Average vacancy rate 8%
Gross monthly income $ 43,700 =50*950*(1-8%)
Gross annual income $ 524,400 =43700*12
Net operating expenses $ 157,320 =524400*30%
Net profit per year $ 367,080 =524400-157320


Annual interest rate (cap rate) = 8.3%

Economic value of the project is determined based on lifetime of the project.

Lifetime of the project is not specified.

Considering 10 years of project life, uniform series present worth factor (P/A, 8.3%, 10)

= (1-1.083^(-10))/0.083

= 6.6202

Based on 10 years of project life, the economic value of this project = Net annual profit * (PA, 8.3%, 10)

= 367,080 * 6.6202

= $ 2,430,143

[this calculation is considering 10 years of project life. the answer will vary depending upon the life of project]

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ekkarill92 answered 7 months ago
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