2. Argo's real estate department is considering buying an office and leasing it out. They ask you to calculate the NPV (7% discount rate) and IRR of the investment and have given you the data below. Assume that the office is sold in year 20 and that the mortgage runs 20 years. Item Inflator Value 2,500 955,000 20% 4.4% Square Footage Property Price ($) Down Payment Interest Rate Closing Costs at Start Broker Fee in Year 20 Yearly Property Appreciation Rent/ sq. ft/Inflator Op. Costs/ year ($) Inflator Tax Rate Depreciation/ year ($) $5,000 5.5% 1.7% 1.5% 1.5% 3.30 9,640 21.0% 4,000 1 M 9 N 10 P 12 Q 13 R 14 11 S 15 16 U 17 Y 18 19 20 B E F H J L 1 0 1 2 3 5 6 7 8 Key Assumptions 3 Square footage 4 Property price ($) | Down payment 6 Interest rate 7 Closing costs at start 3 Broker fee in year 20 9 Property Value 0 Yearly appreciation 1 Mortgage Balance 2 Net Property Value 3 Operating Assumptions 4 Rent/sq.ft. / Inflator 5 Op. costsyr. ($)/Inflator 6 Tax rate 7 Depreciation/year ($) Cash Flows Rent Income 20 minus: Operating Costs 21 minus: Debt Amortization 22 plus: Interest tax shield 23 plus: Depreciation tax shield minus: Initial Expenses 25 plus: Sale Property in year 20 26 Total Cash Flows 27 IRR 28 NPV 7% 29 80 Note: Tax shields are the tax gains from expensing interest or depreciation. The general formula is interest expense x tax rate for interest tax shield. 31 32 L M N 0 P Q R U 2 3 4 5 9 10 11 12 13 14 15 16 17 18 19 20 2 3 Beg. Balance 4 Payment 5 Interest 6 Principal 7 Ending Balance