Suppose you are considering the acquisition of a hotel that is currently trading at $ 67 million. The current return on such investments on the market is estimated at 10%. The investor’s required rate of return is of 11%. The asset's (annual) NOI for the next 5 years [i.e. the current lease term) is $ 6,000,000. At the end of the current lease, you expect the NOI to increase to $ 6,500,000 for the foreseeable future. You anticipate selling the property five years from today. The building to land value ratio is 3:1 and the depreciable life of the property is 39 years. You contacted your banker who is willing to give you a LTV of 80%. The mortgage loan details are: 7.5% 30-year monthly amortizing loan. The tax rates are as follows: 22% income tax, 25% depreciation recapture tax, 20% capital gains tax. Consider straightline depreciation. The going-in Cap rate is 7%. 5 years later, 50bps additional risk premium should be applied to estimate the going-out cap rate. The cost of sales( and purchase) is 3%. 

1. What is the taxable income in year 4?

a)      $ 832,534

b)      $ 2,120,996

c)       $ 4,093,195

d)      $ 183,158

2. On the basis of the data provided at question 6, what is the overall gain during the sale of the property?

a)      $ 10,600,000

b)      $ 17,042,308

c)       $ 23,508,974

d)      $ 19,422,308

3. On the basis of the data provided at question 6, how much (in $) is the capital gain tax?

a)      $ 6,671,785

b)      $ 1,824,632

c)       $ 3,413,333

d)      $ 9,123,160

4.   On the basis of the data provided at question 6, calculate your IRR based on BTCF.

a)      18.11%

b)      24.17%

c)      25.27%

d)      25.72%

5.   On the basis of the data provided at question 6, calculate your IRR based on ATCF.

a)      17.61%

b)      19.92%

c)      21.12%

d)     22.12%