a. Prepare the before-tax and after-tax cash flow statements for each of the 5 years. b. Calculate the before-tax and after-tax IRR on this investment.

Q3. Use the cash flow pro forma approach we have discussed in class to answer the following question (3 points). An investor is considering an apartment investment with the following assumptions: Building information: Number of Units 30 apartment units at an average of 1500 square feet per apartment Asking Price $500,000 Rents $450 /month/unit in year 1; expected to increase 3%/year V&C Losses 3 apartment unit per year Operating Expenses $50,000 in year 1; expected to increase 3 percent per year Depreciation Building Value / Total Value 85 percent Useful Life 27.5 years Financing Information: Financing Loan-to-Value Ratio 70 percent Interest Rate 10 percent Maturity 30 years with monthly payments 5 percent of amount outstanding Prepayment Penalty Holding Period 5 years Expected Selling Price $600,000 Selling Expenses 6 percent of the selling price Tax Rate: 28 percent Marginal Tax Rate Capital Gain Tax Rate Depreciation Recapture Tax Rate 15 percent 25 percent Q3. Use the cash flow pro forma approach we have discussed in class to answer the following question (3 points). An investor is considering an apartment investment with the following assumptions: Building information: Number of Units 30 apartment units at an average of 1500 square feet per apartment Asking Price $500,000 Rents $450 /month/unit in year 1; expected to increase 3%/year V&C Losses 3 apartment unit per year Operating Expenses $50,000 in year 1; expected to increase 3 percent per year Depreciation Building Value / Total Value 85 percent Useful Life 27.5 years Financing Information: Financing Loan-to-Value Ratio 70 percent Interest Rate 10 percent Maturity 30 years with monthly payments 5 percent of amount outstanding Prepayment Penalty Holding Period 5 years Expected Selling Price $600,000 Selling Expenses 6 percent of the selling price Tax Rate: 28 percent Marginal Tax Rate Capital Gain Tax Rate Depreciation Recapture Tax Rate 15 percent 25 percent