You are considering the acquisition of a hotel that is currently trading at $ 67 million.

The current return on such investments on the market is estimated at 10%.

The investors required rate of return is 11%.

The asset's (annual) NOI for the next 5 years [i.e. the current lease term) is $ 6,000,000.

At the end of the current lease, you expect the NOI to increase to $ 6,500,000 for the foreseeable future.

You anticipate selling the property five years from today.

The building to land value ratio is 3:1 and the depreciable life of the property is 39 years.

You contacted your banker who is willing to give you an LTV of 80%.

The mortgage loan details are: 7.5% 30-year monthly amortizing loan.

The tax rates are as follows: 22% income tax, 25% depreciation recapture tax, 20% capital gains tax.

Consider straight-line depreciation.

The going-in Cap rate is 7%.

5 years later, 50 basic points(bps) additional risk premium should be applied to estimate the going-out cap rate.

The cost of sales is 3%.

Question 1: What is the taxable income in year 4?

a) $ 832,534

b) $ 2,120,996

c) $ 4,093,195

d) $ 183,158

Question 2: What is the overall gain during the sale of the property?

a) $ 10,600,000

b) $ 17,042,308

c) $ 23,508,974

d) $ 19,422,308

Question 3: How much (in $) is the capital gain tax?

a) $ 6,671,785

b) $ 1,824,632

c) $ 3,413,333

d) $ 9,123,160

Question 4: Calculate your IRR based on Net cashflow before taxes(BTCF)?

a) 18.11%

b) 24.17%

c) 25.27%

d) 25.72%

Question 5: calculate your IRR based on Net cash flow after taxes (ATCF)

a) 17.61%

b) 19.92%

c) 21.12%

d) 22.12%