Consider the possible purchase of an office building

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Consider the possible purchase of an office building for $ 8.5 million financed 70% by mortgage and 30% by equty. The cost of land was $1,275,000= and the property is depreciated on a straight line basis over 39 years. The property is leased out for 5 years and the projected NOI for year one is $ 922750 and will grow at 3% annually thereafter. The loan is amortized over a 20 year term at an interest of 10%. The capital gain tax is 15% of price appreciation and 25% on the depreciation recapture. Tax on income is 36%. The required rate of return for equity is 12%. The property can fetch $ 9.7 million at end of year 5. Compute the after tax equity IRR. Should the propert be purchased?

Reference no: EM131183114

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