QUESTION 2

A property could be sold today for $2.5 million. It has a loan balance of $1 million and, if sold, the investor would incur a capital gain tax of $112,500. The investor has determined that if it were sold today, she would earn an IRR of 15 percent on equity for the past ten years. If not sold, the property is expected to produce after-tax cash flow from operations of $50,000 over the next year. At the end of the next year, the property value is expected to increase to $2.65 million, the loan balance will decrease to $900,000, and the amount of capital gains tax due is expected to increase to $135,000. What is the marginal rate of return for keeping the property one additional year?

	a.	24.2%
	b.	16.4%
	c.	26.1%
	d.	20.0%

Which of the following would be considered when an investor is trying to decide whether or not to renovate a property?

	a.	The difference between future operating income if renovated and if not renovated
	b.	The mortgage balance on the property in the year before renovation
	c.	After-tax cash flow from sale in the year of renovation
	d.	After-tax operating income before renovation