You are still an employee of University Consultants, Ltd. The investor tells you she would like to know how tax considerations affect your investment analysis. You determine that the building represents 90 percent of value and would be depreciated over 27.5 years (use 1/27.5 per year). The potential investor indicates that she is in the 36 percent tax bracket and has enough passive income from other activities so that any passive losses from this activity would not be subject to passive activity loss limitations. Capital gains from price appreciation will be taxed at 20 percent and depreciation recapture will be taxed at 25 percent.

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

2. How does (a) above compare with the before-tax IRR (BTIRR) calculated in Task 1?

(c) How would you evaluate the tax benefits of this investment?