A property could be sold today for $2.08 million. It has a loan balance of $1.16...

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A property could be sold today for $2.08 million. It has a loan balance of $1.16 million and, if sold, the investor would incur a capital gains tax of $266,000. The investor has determined that if it were sold today, she would earn an IRR of 15 percent on equity for the past five years. If not sold, the property is expected to produce after-tax cash flow of $56,420 over the next year. At the end of the year, the property value is expected to increase to $2.18 million, the loan balance will decrease to $912,000, and the amount of capital gains tax due is expected to increase to $271,000. The owner determines that if the property were renovated instead of sold, after-tax cash flow over the next year would increase to $88,920 and the property could be sold after one year for $2.48 million. Renovation would cost $266,000. The investor would not borrow any additional funds to renovate the property. Required: a. What is the rate of return that the investor would earn on the additional funds invested in renovating the property? b. Would you recommend that the property be renovated? Assume that renovation amount if invested elsewhere can earn a higher return with the same or less risk. A property could be sold today for $2.08 million. It has a loan balance of $1.16 million and, if sold, the investor would incur a capital gains tax of $266,000. The investor has determined that if it were sold today, she would earn an IRR of 15 percent on equity for the past five years. If not sold, the property is expected to produce after-tax cash flow of $56,420 over the next year. At the end of the year, the property value is expected to increase to $2.18 million, the loan balance will decrease to $912,000, and the amount of capital gains tax due is expected to increase to $271,000. The owner determines that if the property were renovated instead of sold, after-tax cash flow over the next year would increase to $88,920 and the property could be sold after one year for $2.48 million. Renovation would cost $266,000. The investor would not borrow any additional funds to renovate the property. Required: a. What is the rate of return that the investor would earn on the additional funds invested in renovating the property? b. Would you recommend that the property be renovated? Assume that renovation amount if invested elsewhere can earn a higher return with the same or less risk.

Answer rating: 100% (QA)

Analyzing Investment Options Sell vs Renovate Scenario 1 Sell the Property Selling price 208 million Loan balance 116 million Capital gains tax 266000 ... View the full answer