An Apartment Complex Has 100 Units of Which on Average

question 19

Essay

An apartment complex has 100 units of which on average 5 are vacant at any given time. Per unit, the rent is $1000 per month, and the operating expenses paid by the landlord including realistic capital reserve) average $5000 per occupied unit) per year. Both rents and expenses are expected to grow at 1 percent per year in perpetuity, and the building value is expected to remain a constant multiple of its net income.
a) What is the projected potential gross income PGI) for the property in the first year?
b) What is the projected effective gross income EGI) for the property in the first year?
c) What is the projected net operating income NOI) for the property in the first year?
d) Suppose historically properties like this have averaged total returns of 10% per year when T-bills have averaged returns of 7%. If T-bills are currently yielding 5%, what is the NPV of a deal to purchase this property for $7,000,000?

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Definitions:

Milling Department

A division or area in a manufacturing facility where milling processes are carried out to shape materials into finished products or components.

Manufacturing Overhead

All indirect costs associated with manufacturing, including indirect labor, materials, and utilities, not directly tied to the production of goods.

Job-Order Costing System

A cost accounting method that captures the financial performance of individual jobs or projects, tracking direct labor, direct materials, and applied overhead per task.

Predetermined Overhead Rate

A rate used to allocate manufacturing overhead to products or cost objects, calculated before the production starts based on estimated costs.