Problem:

You are analyzing a commercial real estate investment that generates a net operating income of $900,000 which increases by 3.0 percent per year. The purchase price is $9 million, of which $1,500,000 is land value, the holding period is 5 years, the nominal income tax rate is 28 percent, the recapture tax rate is 25 percent and the long-term capital gain tax rate is 20 percent. A lender is willing to provide financing for the 5 year holding period with a 25 year amortization period for a fixed rate of 4.25 percent based on a loan to value ratio of 70 percent. The cost of sale is three percent.

Required:

Question: Calculate the before and after tax IRR and NPV based on a discount rate of 2% above the going in cap rate and a terminal cap rate equal to the going in cap rate.

Note: Please show guided help with steps and answer.