3.(9 points) The asking price for the property is $1,000,000; rents are estimated at $200,000 during the first year and are expected to grow at 5 percent per year. Vacancies and collection losses are expected to be 10% of rents. Operating expenses will be 35 percent of effective gross income. Capital expenditures will be 5% of effective gross income. A 30-year fixed rate loan for 70 percent of the purchase price can be obtained at 10 percent interest rate. The property is expected to appreciate in value at 3 percent per year and is expected to be owned for seven years and then sold.

The investor tells you he would also like to know how tax considerations affect your investment analysis. You determine that the building represent 90 percent of value and would be depreciated over 27.5 years. The potential investor indicates that he is in the 28 percent tax bracket. Capital gains tax rate is 20% while depreciation recapture tax rate is 25%.

1. Write down the cash flows pro forma for year 1 to year 7.

2. What is the investors expected before-tax internal rate of return in equity

   invested (BTIRR)? Show your work.

3. What is the investors expected after-tax internal rate of return on equity

   invested(ATIRR)? Show your work?