1) Sally and Dave intend to take a 10 year mortgage for $50,000. The mortgage has interest rate of 8%, compounded annually. Repayment of the mortgage is in equal annual payments of interest and principal. 2) Sally and Dave can rent out the condo for $2,000 per month. Theyll have to pay property taxes Of $1,500 annually and theyre figuring on additional miscellaneous expenses of $1,000 per year. All the income from the condo has to be reported on their annual tax return. Currently Sally & Dave has a tax rate of 30%, and they think this rate will continue for the foreseeable future. 3) The full cost of the condo can be depreciated over 25 years on a straight - line basis. 4) To calculate the return from owning the condo, Sally and Dave assume that they will sell the Condo at the end of 10 years for $100,000. Any gain over book value on the sale is, of course, taxable. Assignment: 1. Use the template for this case to calculate Sally and Daves IRR on their equity investment. (Terminology: Since the cost of the condo is $100,000 and since theyre borrowing $50,000, the equity investment is $50,000.) Remember that for income tax purposes depreciation and interest on the mortgage are expenses, but that repayment of mortgage principal is not an expense. Use Excels IPMT and PPMT functions (see explanation below). 2. Show (in a data table) the effect on the equity IRR when the mortgage goes from $0, $10,000, $20,000, ... , $90,000 . Explain your results. 3. Show (in a data table) the effect on the equity IRR when the tax rate varies from 0% to 40% (in steps of 5%). 4. Suppose that Sally and Dave take a $50,000 mortgage with a 25 -year term. They still plan to sell the apartment at the end of year 10. At this date they will repay the remaining mortgage principal with a 2% enalty for early repayment. Calculate the equity IRR

SALLY & DAVE'S CONDO--Template
Condo purchase price	100,000.00
Annual rent	24,000.00
Property tax, annual	1,500.00
Other expenses, annual	1,000.00
Depreciation	4,000.00	#NAME?
Tax rate	30%
Mortgage
Principal	50,000.00
Interest	8%
Term	10
Annual payment	$7,451.47	#NAME?
Calculation of income for tax purposes
Year	0	1	2	3	4	5	6	7	8	9	10
Rent
Miscellaneous expenses
Property taxes
Other expenses
Depreciation
Mortgage interest
Reportable income
Taxes
Net income
Cash flow to Sally & Dave
Net income
Add back depreciation
Take out mortgage principal repayment
Equity cash flow
Terminal value
Total equity cash flow
IRR--compound return to equity		#NAME?
Terminal value
Estimated resale value, year 10
Book value
Taxable gain		#NAME?
Taxes		#NAME?
Net after tax		#NAME?