An investor is considering buying a rental duplex with land valued at $30,000 and the building valued at $150,000. Straight-line depreciation over 27 12 years will be taken. The investor will be actively involved in the management of the property. He is in a 30% tax bracket.

Assume potential gross income of $44,000 in year one, vacancy of 12% and Operating expenses equal to 40% of Effective gross income. Gross potential income is expected to increase by 2% each year over the holding period.

A lender will make a 20-year loan equal to 75 percent of the total value of the property at 9 percent interest with monthly payments. Assume that there is 3 percent inflation related to total property value each year the investor owns the property and that there is a 4% commission paid (selling expenses) in the year of sale.

Assume that the investor's after tax required rate of return is 12% and will hold the property for three years. Use the 25% tax rule where: for capital gain -- (tax rate >25% use marginal tax rate of 15%); for depreciation recapture-(tax rate >25% use marginal tax rate of 25%).

calculate the following:

1. the after tax cash flows from operation in year 2.

A. $6,631 B. $6,937 C. $7,192 D. $7,492 E. $7,641

2. the after tax cash flow from sale of the asset in year three.

A. $44,561 B. $46,856 C. $56,727

3. NPV

A. -$12,616 B. -$12,610 C. +$12,410

4. IRR

A. 22.88% B. 21.67% C. 20.34%

5. DCR for year 1