Practice problem for the second exam (ATCF) You are considering purchasing the Chung Apartment complex. The following information is available. The purchase price is $1,100,000 with land value of $185,000. 80% of the total structure cost is depreciable for 30 years. There are 10 units with an initial rent of $1,600 per unit per month. Rents are expected to increase 10% after the first year and 5% each year thereafter. Vacancy is expected to be 6% of gross rent. Operating expenses are expected to be 38% of EGI. The bank will loan 80% of the purchase price at a contract fixed interest rate of 8% for 20 years, monthly payments. This loan has a 4% financing costs paid at closing. The going-out cap rate is 10%. Selling expenses will be 10% of the selling price. The holding period is two years. [Income tax rates] The buyer will be in a 30% marginal tax bracket for the first year but will move to a 33% tax bracket beginning the second year. The buyer has a 25% tax rate for depreciation recovery and a 15% tax rate for capital gains. . The buyer has a required equity return of 12%. 1. What is NOI for the first year? 2. What is NOI for the second year? 3. What is the mortgage payment (D.S.) in the first year? 4. What is the depreciation in the first year? 5. What is the total taxes from operation in year one? 6. What is the total taxes from operation in year two? 7. What is the expected selling price? 8. What is the initial equity investment? 9. What is the unpaid mortgage balance at the end of holding period? 10. What is the depreciation recovery (depreciation * holding period)? 11. What is the depreciation recovery tax amount? 12. What is the capital gain tax amount? 13. What is the before-tax equity reversion (BTER)? 14. What is the after-tax equity reversion (ATER)? 15. What is the total taxes on sale?