An investor is considering buying a rental duplex with land valued at $30,000 and a building valued at $150,000. Straight-line depreciation over 27 1⁄2 years will be taken. The investor will be actively involved in the management of the property. He is in a 30% tax bracket.

Assume potential gross income of $44,000 in year one, vacancy of 12% and Operating expenses equal to 40% of Effective gross income. Gross potential income is expected to increase by 2% each year over the holding period.

A lender will make a 20-year loan equal to 75 percent of the total value of the property at 9 percent interest with monthly payments. Assume that there is 3 percent inflation related to total property value each year the investor owns the property and that there is a 4% commission paid (selling expenses) in the year of sale.

Assume that the investor’s after-tax required rate of return is 12% and will hold the property for three years. Use the 25% tax rule where: for capital gain -- (tax rate >25% use marginal tax rate of 15%); for depreciation recapture-(tax rate >25% use marginal tax rate of 25%).

Question:
1. the after-tax cash flows from operation in year 2.
A. $6,631 

B. $6,937 

C. $7,192 

D. $7,492 

E. $7,641

2. the after tax cash flow from sale of the asset in year three.

A. $44,561 

B. $46,856 

C. $56,727

3. NPV

A. -$12,616 

B. -$12,610 

C. +$12,410

4. IRR

A. 22.88% 

B. 21.67% 

C. 20.34%

5. DCR for year 1

A. 1.27 

B. 2.87 

C. 1.59

D. $59,476 

E. $62,723

Answer rating: 100% (QA)

Step 1 Calculation of property value at end of year 3 loan outstanding at end of year 3 Workings Ste... View the full answer