Question

Sally and Dave are considering buying an investment apartment.

–The condo costs $400,000, and they’re planning to buy it in cash

–They can rent out the condo for $24,000 per year ($2K per month)

–There are additional miscellaneous expenses of $2,400 per year (condo fees of $200 per month).

–Property taxes are $1,500 annually.

–Currently, Sally and Dave have a tax rate of 30%.

–Assume the full cost of the condo depreciates over 30 years.

–Sally and Dave assume that at the end of the 10 years they’ll be able to sell the condo for $680,000.

2. Consider 2% inflation affecting the fees and the rent

What is the IRR?

What if they can sell the property in 10 yrs for $500,000?

Answer 1

Part (a): Calculation of IRR if sale value is $680000 Particulars Initial Investment Condo Cost -400000 1 2 3 4 | 5 | 6 7 8 9 10 24000 -2400 24480 -2448 24969.6 -2496.96 25468.99 25978.37 26497.94 27027.9 27568.46 28119.83 28682.22 -2546.9 -2597.84-2649.79 -2702.79 -2756.85 -2811.98 -2868.22 Operating Cashflows Less: Miscellaneous Expenses Less: Depreciation (400000 / 30 years) Less: Property Taxes Profit Before Tax Less: Tax@30% Profit After Tax Addback Depreciation Net Operating Cashflows -13333.3-13333.3-13333.3-13333.3-13333.3-13333.3-13333.3-13333.3-13333.3-13333.3 - 1500 -1500 -1500 15001 - 1500 -1500 15001 - 1500 -1500 -1500 6766.667 7198.667 7639.307 8088.759 8547.201 9014.812 9491.775 9978.277 10474.51 10980.67 2030 2159.6 2291.792 2426.628 2564.16 2704.444 2847.5322993.483 3142.353 3294.2 4736.667 5039.067 5347.515 5662.132 | 5983.041 6310.3686644.242 6984.794 | 7332.157 7686.466 13333.33 13333.33 13333.33 13333.33 13333.33 13333.33 13333.33 13333.33 13333.33 13333.33 18070 18372.4 18680.85 18995.46 19316.37 19643.7 19977.58 20318.13 20665.49 21019.8 680000 Residual Value Sale Value Less: Depreication (400000 * 20/30 years) Net sale value Less: Tax@30% Value after tax Addback Depreciation Net sale value -266667 413333.3 - 124000 289333.3 266666.7 556000 -400000 18070 18372.4 18680.85 18995.46 19316.37 19643.7 19977.58 20318.13 20665.49 577019.8 Total Cashflows (D=A+B+C) IRR 8% Part (b): Calculation of IRR if sale value is $500000 Particulars 0 Initial Investment Condo Cost -400000 1 2 3 5 6 7 8 9 10 24000 -2400 24480 -2448 24969.6 -2496.96 25468.99 25978.37 26497.94 27027.9 27568.46 28119.83 28682.22 -2546.9 -2597.84-2649.79-2702.79 -2756.85 -2811.98-2868.22 Operating Cashflows Less: Miscellaneous Expenses Less: Depreciation (400000 / 30 years) Less: Property Taxes Profit Before Tax Less: Tax@30% Profit After Tax Addback Depreciation Net Operating Cashflows -13333.3 -13333.3 -13333.3 -13333.3 -13333.3 -13333.3 -13333.3 -13333.3 -13333.3 -13333.3 -1500 1500 1500 1500 1500 1500 1500 1500 1500 - 1500 6766.667 7198.667 7639.3078088.759 8547.201 9014.8129491.775 9978.277 10474.51 10980.67 2030 2159.6 2291.792 2426.628 2564.16 2704.444 2847.5322993.483 3142.353 3294.2 4736.667 5039.067 5347.515 5662.132 | 5983.041 6310.3686644.242 6984.794 | 7332.157 7686.466 13333.33 13333.33 13333.33 13333.33 13333.33 13333.33 13333.33 13333.33 13333.33 13333.33 18070 | 18372.4 18680.85 18995.46 | 19316.37 19643.7 19977.58 20318.13 20665.49 21019.8 500000 Residual Value Sale Value Less: Depreication (400000 *20/30 years) Net sale value Less: Tax@30% Value after tax Addback Depreciation Net sale value -266667 233333.3 -70000 163333.3 266666.7 430000 18070 18372.4 18680.85 18995.46 19316.37 19643.7 19977.58 20318.13 20665.49 451019.8 Total Cashflows (D=A+B+C) IRR -400000 5%