Question 4 (30 marks) Mr. Toh is considering the purchase of a house along Farrer Road for investment. The property is expected to have a NOI of $185,000 in the first year. The NOI is expected to increase by 2.5% per year thereafter. The house is currently valued at $5,000,000. Mr. Toh expects to sell the house at the end of 3 years for $6,000,000, realizing a gross profit of $1,000,000. Mr. Toh is considering two monthly-amortizing loans. The first loan is a 70% financing loan at an interest rate of 2.5% per annum for 25 years and the second loan offers 60% financing at 4% per annum for 25 years. Assume a selling expense (that includes seller's stamp duty) of 9% of the sale price and a tax rate of 18%. (a) What would the before-tax IRR (BTIRR) on equity and the after-tax (ATIRR) on equity be at each level of financing? (20 marks) (b) Does each loan offer favourable financial leverage? Which loan would you recommend to Mr. Toh? (10 marks) Question 4 (30 marks) Mr. Toh is considering the purchase of a house along Farrer Road for investment. The property is expected to have a NOI of $185,000 in the first year. The NOI is expected to increase by 2.5% per year thereafter. The house is currently valued at $5,000,000. Mr. Toh expects to sell the house at the end of 3 years for $6,000,000, realizing a gross profit of $1,000,000. Mr. Toh is considering two monthly-amortizing loans. The first loan is a 70% financing loan at an interest rate of 2.5% per annum for 25 years and the second loan offers 60% financing at 4% per annum for 25 years. Assume a selling expense (that includes seller's stamp duty) of 9% of the sale price and a tax rate of 18%. (a) What would the before-tax IRR (BTIRR) on equity and the after-tax (ATIRR) on equity be at each level of financing? (20 marks) (b) Does each loan offer favourable financial leverage? Which loan would you recommend to Mr. Toh? (10 marks)