Calculate the effective gross income

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1. The asking price for a suburban office building is $5,000,000; rents are estimated at$550,000 during the first year and are expected to grow at 2 percent per year thereafter.Vacancies and collection losses are expected to be 6 percent of rents. Operating expenseswill be 35 percent of effective gross income. A 65% LTV loan can be obtained at 7.5percent interest for 10 years (assume payment and interest is calculated on an annualbasis, and the loan is fully amortizing over a 30 year period). The property is expected toappreciate in value at 3 percent per year and the holding period is expected to be fiveyears. Selling expenses are estimated at 7% of the sales price. Assume the appropriateincome tax rate is 25%, the rate of depreciation recapture is 25%, and the capital gain taxrate is 15%. The value of the improvements is estimated at 60% of the purchase price byan appraiser. Answer the following questions

a) Calculate the effective gross income (EGI) and the net operating income (NOI)for each of the five years.

b) Calculate the total debt service, interest payment, and amortization in each of thefive years?

c) Calculate the taxes due on the sale of the property.

d) Calculate the after-tax internal rate of return on this investment. If the investor's(after-tax) opportunity cost of capital is 10%, should she go ahead with thisinvestment?

Reference no: EM13970904

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