We will use a discounted cash flow model and a financial proforma to evaluate expected cash flows and investment returns for 18512

Spicer Lake Ct, Reno, NV. We will imagine it is July 2014, and we want to decide if we will get a greater return investing in the Spicer single-family home or a portfolio of stocks. We start with the following assumptions to create our baseline return for the single-family house.

Assumptions:

Purchase Price= $265,000

Monthly rent= $2,800

Rent growth rate= 3%

Vacancy rate= 10% (of PGI)

Opex= 30% (of EGI)

Capex= 5% (of EGI)

Buying costs= 2%

Selling costs= 3%

Capital gains tax rate= 20%

Depreciation recapture tax rate= 25%

Your ordinary income tax rate= 24%

LTV ratio= 80%

Annual interest on loan= 5%

Holding period= 8 years

Annual miscellaneous income= $0

MI growth rate= 0%

Length of loan= 30 years

Depreciation of residential property= 27.5 years Percent of purchase that is land= 10%

Projected sales price= $554,000

What if the tax surveyor said that the land value should be 20% of the purchase price. What is the

new ATIRR with the higher land value? (After you answer the question correctly switch assumptions

to the baseline assumptions)

What if we were able to negotiate a better purchase price. What is the new ATIRR if we purchased the property for $250,000? (After you answer the question correctly switch assumptions to the

baseline assumptions)