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Challenging NPV problem

Real estate investment from past mock exam:

Purchase price: 2.5 milion

Down payment is $500,000, financing at 10%, with 20 annual end of year payments of 234,919 each. 

Gross annual rents are 300,000

Depreciation is 60,000 per year

Maintenance and taxes are 35,000 per year.

The building will be sold at the end of 2 years, producing net after tax proceeds of 610,000 after the loan balance is repaid. Millers client, the prospective purchaser, is in the 35% marginal income tax bracket. 

The NPV of this project at a 10% discount rate, based on these estimates is closest to:

a) -19,000

b) 28,000

c) 52,000

d) 64,000

~ The best is yet come ~

"indispensable down the final stretch and had a HUGE impact on my studies." - Christopher, USA

christopheausina wrote:
Down payment is $500,000, financing at 10%, with 20 annual end of year payments of 234,919 each.

Wonder how they got $234,919? 10% of 2M = 200k. I don’t suppose we subtract 200k on top of the $234,919.

christopheausina wrote:
Maintenance and taxes are 35,000 per year.

This is also unclear to me, are these property taxes like council rates?

Atomic_Sheep wrote:

christopheausina wrote:
Down payment is $500,000, financing at 10%, with 20 annual end of year payments of 234,919 each.

Wonder how they got $234,919? 10% of 2M = 200k. I don’t suppose we subtract 200k on top of the $234,919.

christopheausina wrote:
Maintenance and taxes are 35,000 per year.

This is also unclear to me, are these property taxes like council rates?

pv = 2,000,000 i = 10% n = 20    pmt -> 234,919

yes Cheswick, you are correct; what do you think about the cash flows? I am having trouble in making the 2nd year cash flow

~ The best is yet come ~

christopheausina wrote:

yes Cheswick, you are correct; what do you think about the cash flows? I am having trouble in making the 2nd year cash flow

First off, this question is far more complicated than anything you’d find on a level 1 exam, and quite frankly more poorly written. I assume maintenance and taxes is referring to some sort of property tax.

Intial outflow, cf0: -500,000

Year one: Income tax: (300,000 - 60,000 - 2M*.1 - 35,000) *0.35= 1750

CF1: 300,000 - 35000 - 234919 - 1750 = 28331

Remaining principal for year 2: 1,965,081 

Year two tax: (300,000 -60000 - 196508 - 35000) * 0.35 = 2972

cf2: 300,000 - 35 000 - 234 919 - 2972 + 610000 = 637109

NPV @ 10% = 52,292

Thank you!!!! Yes, this was very confusing and challenging. 

~ The best is yet come ~

cheswick wrote:
pv = 2,000,000 i = 10% n = 20    pmt -> 234,919

Thanks cheswick, I interpreted 10% as a coupon payment on a bond. Will have to think about it some more as I’m obviously confused somewhere.

cheswick wrote:
First off, this question is far more complicated than anything you’d find on a level 1 exam

This was my first impression also.

cheswick wrote:
NPV @ 10% = 52,292

On the exam, you won’t have answers that are off by this much to your calculations.