A real estate broker is offering a commercial property building for sale that has the following

characteristics:

a. The purchase price is $5.5M, with land valued at $500,000 (part of the $5.5M).

b. The 210 commercial units rent for $750 per month with rent expected to increase by

3% per year starting at year 2.

c. Vacancy and collection loss allowance is 8% of the potential gross income.

d. Operating expenses are expected to be 38% of effective gross income.

e. The real estate agent estimates that the value of the property, net of selling expenses,

will be $6.2M at the end of a five-year investment horizon (this is the net sale

proceeds).

f. The investor gets a 14%, $4M, 20-year mortgage with monthly payments.

g. The cost recovery allowance recapture rate is 25%.

h. The investors ordinary income tax rate is 28%.

i. The investors capital gain tax rate is 15%.

j. The appropriate discount rate for this investment (required return) is 18%.

Calculate the relevant cash flows for this investment and apply the NPV and IRR rules to