A real estate investor has the following information on an apartment building:

A.Purchase Price is $1,125,000 with acquisition costs of $50,000

B.33,600 leasable square feet

C.Initial rent of $12/sq. ft. per year and will increase 5 percent per year

D.Vacancy rate of 5% of gross rent per year

E.Operating Expenses are 40% of Effective Gross Income

Four financing choices:

1. All equity without any mortgage;

2. Mortgage with 75% LTV ratio, 20 years, annual payments and 9% contract rate;

3. Mortgage with 80% LTV ratio, 20 years, annual payments and 10.5% contract rate;

4. Mortgage with 85% LTV ratio, 20 years, annual payments and 13.0% contract rate;

Expected increase in value is 3.50% per year, 5% selling expenses

Holding period is 3 years and the capital improvement expenditures are assumed to be $10,000 in the first three years.

80% depreciable

Investor's tax rate is 28%, and capital gain tax rate is 15%.

Questions:

1. Compute equity after-tax cash flows in year 1, year 2 and year 3 for each financing choice.

2. What is the equity after-tax return (internal rate of return) for each financing choice and which choice would you like to make.