Richard Rambo presently owns the Marine Tower office building, which is $20$ years old, and is considering renovating it$.$ He purchased the property two years ago for $$812,800$ and financed it with a $20-$year, $75$ percent loan at $4\mathrm{.}50$ percent interest $($monthly payments$).$ Of the $$812,800,$ the appraiser indicated that the land was worth $$200,000$ and the building $$612,800.$ Rambo has been using straight$-$line depreciation over $39$ years $(1/39$ per year for simplicity$).$ At the present time Marine Tower is producing $$52,800$ in NOI, and the NOI and property value are expected to increase $2$ percent per year. The current market value of the property is $$866,000.$ Rambo estimates that if the Marine Tower office building is renovated at a cost of $$200,000,$ NOI will be about $20$ percent higher next year $($$$63,360$ vs$.$ $$52,800)$ due to higher rents and lower expenses. He also expects that with the renovation the NOI will increase $3$ percent per year instead of $2$ percent. Furthermore, Rambo believes that after five years, a new investor will purchase the Marine Tower office building at a price based on capitalizing the projected NOI six years from now at a $6$ percent capitalization rate. Selling costs would be $4$ percent of the sale price. Rambo is currently having to pay $35$ percent tax on ordinary income, $20$ percent on capital gain, and $25$ percent on depreciation recapture which he expects to remain the same in the future. He also would not be subject to any passive activity loss limitations$.$ If Rambo does the renovation, he believes that he could obtain a new loan at a $5$ percent interest rate and a $20-$year loan term $($monthly payments$).$

Required:

a$.$ Assume that if Rambo does the renovation, he will be able to obtain a new loan that is equal to the balance of the existing loan plus $75$ percent of the renovation costs. What is the incremental return $($ATIRRe$)$ for doing the renovation versus not doing the renovation? Assume a five$-$year holding period from now.

b$.$ Repeat $($a$)$ but assume that Rambo is able to obtain a new loan that is equal to $70$ percent of the sum of the current value of the property $($$$866,000)$ plus the renovation costs $($$$200,000).($This assumes that after renovation the value of the property will at least increase by the cost of the renovation.$)$