You are considering buying a beach house as an investment property. The price today for the beach house is $240,000. You can fully depreciate the house on a straight-line basis over a thirty year period (and deduct this depreciation expense from your income taxes). The rent you will charge on an annual basis will be $10,000. You will face maintenance costs of $2,000 every year (also tax deductible). You intend to sell the property in ten years, and you expect that during the next ten years the market value of the property will appreciate at an annual rate of 5%. Assume that the tax rate for income on the property is 40%, and the tax rate for capital gains on the property is 20%. Also, assume that the appropriate discount rate for your calculations is 12%.

a) What is the NPV of the purchase of the property? b) What is the IRR of the purchase of the property? Could you predict whether the IRR was higher or lower than 12% without calculating it? If so, how?