You are considering the purchase of an office building. The asking price for the property is $100,000,000; rents are estimated at $9,000,000 during the first year and are expected to grow at 4 percent per year. Vacancies and collection losses are expected to be 10% of rents. Operating expenses will be 35 percent of effective gross income. A 10-year FRM (fixed rate mortgage) loan for 65 percent of the purchase price can be obtained at 9 percent interest rate. The property is expected to appreciate in value at 3 percent per year and is expected to be owned for five years and then sold.

a. Write down the cash flows statement for years 1 through 5.

b. What is the expected before-tax internal rate of return? Show your work.

c. Re-do parts a. and b. with no borrowing (100% cash purchase).

d. What is the impact of leverage on the IRR?