This is an exercise aimed at getting you familiarity with a proforma and financial modeling. We learned some basic TVM skills to help us quantify cash flows in different time periods. Now we are applying what we learned into a financial model. We will use a discounted cash flow model and a financial proforma to evaluate expected cash flows and investment returns for 18512 Spicer Lake Ct, Reno, NV. We will imagine it is July 2014, and we want to

decide if we will get a greater return investing in the Spicer single-family home or a portfolio of stocks. We start with the following assumptions to create our baseline return for the single-family house.

Assumptions: Purchase Price= $265,000 Monthly rent= $2,800 Rent growth rate= 3% Vacancy rate= 10% (of PGI) Opex= 30% (of EGI) Capex= 5% (of EGI) Buying costs= 2% Selling costs= 3% Capital gains tax rate= 20% Depreciation recapture tax rate= 25% Your ordinary income tax rate= 24% LTV ratio= 80% Annual interest on loan= 5% Holding period= 8 years Annual miscellaneous income= $0 MI growth rate= 0% Length of loan= 30 years Depreciation of residential property= 27.5 years Percent of purchase that is land= 10% Projected sales price= $554,000

What if your buying and selling costs were increased. Assume new buying costs are 3% and selling costs are 5%. What is the new ATIRR? (After you answer the question correctly switch assumptions to the baseline assumptions)

What if tax rates were lowered. What is the new ATIRR when the new capital gains tax rate is 15% and the depreciation recapture is 20%? (After you answer the question correctly switch assumptions to the baseline assumptions)