Aaron Hersch is a real estate developer who specializes in residential apartments. A complex of 20 run-down apartments has recently come on the market for $332,500. Hersch predicts that after remodeling, the 12 one-bedroom units will rent for $380 per month and the 8 two-bedroom apartments for $440. He budgets 15% of the rental fees for repairs and maintenance. It should be 30 years before the apartments need remodeling again, if the work is done well. Remodeling costs are $15,000 per apartment. Both purchase price and remodeling costs qualify as 27.5-year MACRS property.

Assume that the MACRS schedule uses the straight-line method. It divides the total cost recovery amount by 27.5 and assigns a full year of depreciation to year 1 and a half year to year 28. Hersch does not believe he will keep the apartment complex for its entire 30-year life. Most likely he will sell it just after the end of the tenth year. His predicted sales price is $980,000. Hersch’s required rate of return is 10%, and his tax rate is 38%.

Should Hersch buy the apartment complex? What is the after-tax NPV? Ignore tax complications, such as capital gains.