An old duplex was bought for $200,000 cash. Both sides were rented for $2500 per month. The total annual expenses for property taxes, repairs, gardening, and so forth are estimated at $200 per month. For tax purposes, straight-line depreciation over a 20-year remaining life with no salvage value is used. Of the total $200,000 cost of the property $50,000 is the value of the lot. Assume 38% incremental income tax bracket (combined state and federal taxes) applies throughout the 20 years.

If the property is held for 20 years, what after-tax rate of return can be expected?

(a) Assume the building and the lot can be sold for the lot's $50,000 estimated value.

(b) A more optimistic estimate of the future value of the building and the lot is that the property can be sold for $150,000 at the end of 20 years.

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