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:

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