During a routine discussion, you learned from your accountant that any income earned from investments outside your retirement accounts would be taxed at $37\%,$ barring any significant financial changes. A portion of the taxes owed for the annual income generated from this property can be deferred through the depreciation of the improvements. The points paid to the lender to secure your loan can also be amortized and deducted from your income. It is also important to remember that mortgage interest is tax deductible. Your accountant explained that when you sell the property at the end of the five$-$year holding period, you should budget for a depreciation recapture tax rate of $25\%$ and that any capital gains earned from the sale of the property will be taxed at $20\%.$ A quick review of the public records revealed that the building is currently assessed for $$245,000,$ of which the city allocated $$208,250$ to the improvements. The remainder is allocated to the underlying land. Interest $is5\mathrm{.}5\%,0\mathrm{.}5$ points, $25$ year ammorization period.

Part C $-$ Questions

How much will you pay in mortgage interest in year $1?$

How much will you pay in mortgage interest in year $3?$

What is your taxable income $($or loss$)$ in year $2?$

What is your anticipated after$-$tax cash flow in year $2?$

What is your after$-$tax equity dividend rate in year $1?$

If you can only claim $11\mathrm{.}5$ months' worth of depreciation in your investment's first and last year, how much depreciation do you expect to claim over the holding period?

How much should you anticipate owing in depreciation recapture tax upon selling the property?

What will your adjusted basis be upon selling the property?

Assuming that your investment criteria are such that you need to earn $13\mathrm{.}00\%$ on your equity investment, what is the leveraged, after$-$tax net present value $($NPV$)?$

What is the leveraged, after$-$tax internal rate of return $($IRR$)?$