The asking price for the property is $1,000,000; rents are estimated at $200,000 during the first year and are expected to grow at 5% per year. Vacancies and collection losses are expected to be 10% of rents. Operating expenses will be 35% of effective gross income. Capital expenditures will be 5% of effective gross income. A 30-year fixed rate loan fro 70 percent of the purchase price can be obtained at 10% interest rate. The property is expected to appreciate at 3% per year and is expected to be owned for seven years and then sold. The sale cost is 6% of the sale price.

The investor tells you he would also like to know how tax considerations affect your investment analysis. You determine that the building represent 90% of value and would be depreciated over 27.5 years. The potential investor indicates that he is in the 28% tax bracket. Capital gains tax rate is 20% while depreciation recapture tax rate is 25%.

A) Write down the cash flows pro forma for year 1 to 7

B) What is the investors expected before-tax internal rate of return on equity invested? Show work.

C) What is the investors expected after-tax internal rate of return on equity invested (ATIRR)?

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