An investor is considering buying a rental duplex with land valued at $30,000 and the 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 percent tax bracket.

Assume potential gross income of $28,500 in year one, vacancy of 10% 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 3.5 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%).

1. the after tax cash flows from operation in year 2.

A. -$2,152

B. -$1,244

C. +$1,244

D. +$1,592

E. +$2,158

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

A. -$57,507

B. -$46,856

C. +$47,230

D. +$59,076

E. +$64,052

3. NPV

A. -$1,097

B. -$846

C. +$710

D. +$846

E. +$1,097

4. IRR

A. 17.20%

B. 11.35%

C. 9.34%

D. 12.72%

E.16.11%

5. DCR for year 1

A. 0.76

B. 0.87

C. 0.98

D. 1.06

E. 1.18