You had a building built 25 years ago for $400,000. The market value today is thought to be $563,000. straight-line depr is being used, with a zero salvage value and a life estimate of 40 years. The building produced rental income last year (year 25) of $100,000 with operating expenses of $7000. The rental income has been increasing by 5% each year while operating expenses have been increasing 2% per year.

The tax rate is 40% on ordinary income and 20% on capital gains. The overall inflation rate is expected to average 3.4% for each of the next 4 years.

a. Assume this building is kept for 4 more years and sold at the end of year 4 for $600,000. What is the IRR on this decision to keep the building, rent it for the next four years, and then sell it.

b. Assume that when this building was built 25 years ago, 25% of its cost was financed with a 40-year loan at 8% per year interest. Redo part a.

c. A recent engineering graduate from WMU is proposing that you construct another building that will cost $640,000. Depreciation will also be a straight line with a 40-year life and zero salvage. This building will produce $135,000 in rental income the first year increasing by 5% each year with operating expenses of $9000 the first year, increasing at 2.3% per year. It is expected that this building could be sold in 4 years for $750,000. Calculate the IRR for the new building.

d. You think you might be better off to sell the old building, and build the new one. Determine the IRR on the incremental investment needed to build and operate the new building for the next four years.

e. The government is considering altering depreciation schedules on buildings. The proposal would allow for current assets to have the remaining book value expensed over a three year period, and would allow new assets to be completely expensed the first year. Redo parts a – d with this new proposal in mind.