Answered step by step
Verified Expert Solution
Question
1 Approved Answer
An investor has owned a property for five years. A property could be sold today for $2 million. It has a loan balance of $
- An investor has owned a property for five years. A property could be sold today for $2 million. It has a loan balance of $ 1 million and, if sold, the investor would incur a total of $250,000 in taxes (capital gains tax + depreciation recapture tax). The investor has determined that if it were sold today, she would have earned an IRR of 15% on equity for the past five years. If not sold, the property is expected to produce after tax cash flow of $50,000 over the next two years. At the end of the two years, the property value is expected to increase to $2.1 million, the loan balance will decrease to $900,000. If sold after two years, the investor would incur a total of $255,000 in taxes.
- What is the incremental internal rate of return for keeping the property two additional years?
- The investor has an outside investment opportunity that is expected to earn him a rate of return of 15%. What advice would you give the investor?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started