QUESTION 1

A commercial building that costs x million $ has an annual gross rental income of y million $ in year 1. Operating expenses (maintenance, insurance premium, caretaker services and administration costs) make up 12% of the gross rent. The building is assumed to be sold after 3 years (1 January year 4) for x $ kroner.

Assume further that the purchase and sale value as well as the rental income above are stated in fixed kroner at time 0 and that the annual price increase is budgeted at 2%. The building is depreciated on a balance group of up to 2%. Tax rate is 22%.

Each operating asset that belongs to the balance group must be entered in a separate account, while taxable gains and losses are entered in a joint profit and loss account where the rate for income or deduction is 20%.

Which expression of the project's nominal internal rate before tax is correct?