You have been given the following assignment. You are to present an investment analysis of a new small residential income-producing property for sale to a potential investor. The asking price for the property is $1,350,000; rents are estimated at $250,000 during the first year and are expected to grow at 3% per year thereafter. Vacancies and collection losses are expected to be 10% of rents. Outgoings (operating expenses) will be 35% of effective gross income. A fully amortizing 70% loan can be obtained at 11% for 30 years. The property is expected to appreciate in value at 3% per year and is expected to be owned for 5 years and then sold.

a) What is the investor's expected before-tax internal rate on equity invested (BTIRR)?

b) What is the first-year debt coverage ratio?

c) What is the terminal yield?

Terminal value represents all future cash flows in an asset valuation model. This allows models to reflect returns that will occur in the future that they are nearly impossible to forecast. The Gordon growth model, discounted cash flow and residual earnings all use terminal values that can be calculated with perpetuity growth, while an alternative exit valuation approach employs relative valuation methods.

d) What is the NPV using a 14% discount rate? What does this mean?

e) What is the investor's expected after-tax internal rate of return on equity invested (ATIRR) if he is in the 30% tax bracket and the depreciation is estimated at $30,000 per annum over the next 5 years?

f) Discuss the tax implication.