Mr. and Mrs. Prinze are evaluating an investment in undeveloped land. The year 0 cost is $100,000, and they can borrow $60,000 of the purchase price at 8 percent. They will pay interest only in years 1 through 5. The annual property tax on the land will be $1,200 in years 1 through 5. Mr. and Mrs. Prinze project that they can sell the land in year 5 for $160,000 and repay the $60,000 loan from the sales proceeds. They have a 39.6 percent marginal tax rate and use a 4 percent discount rate to compute NPV. Determine the NPV of this investment under the following assumptions:
a. The Prinzes have enough net investment income and other itemized deductions so that the $6,000 annual carrying charge (interest plus property tax) is deductible in years 1 through 5.
b. Because the Prinzes don’t itemize deductions, they elect to capitalize the annual carrying charge to the basis of the land.