A building project that an investor is considering for purchase is projected to have NOI of $$110,000$ during the first year. After that, the NOI is projected to increase by $3$ percent per year. The property can be purchased for $$1$ million. This price includes a building value of $$850,000$; which will be depreciated over $27\mathrm{.}5$ years; and the land value of $$150,000.$ The building project is expected to be sold after a five$-$year holding period with a value of $$2$ million. The investor is in the $28\%$ tax bracket for ordinary income and capital gains.

The investor is considering the following alternatives:

$$ Option $1$: Use financial leverage. A loan for $$700,000,$ a fixed $12\%$ interest rate $($with yearly payments, Only Interest$)$ over a $15-$year term. The loan balance must be repaid at the time the property is sold and no prepayment penalties.

$$ Option $2$: No use debt. The investor uses $100$ percent of his $($her$)$ equity to invest in this project.

a$.$ Estimate cash flows for $2$ options & calculate BTIRR & ATIRR of them.

b$.$ Which alternative would be the better choice?

c$.$ Calculate DCR in the first year of option $1.$