NPV of real estate investment

Miller is analyzing real estate Purchase price=2.5 million Down payment=0.5million, financing at 10% with annual payment at end of year 234,919 Gross rental income =300,000 Depreciation =60,000 each year Maintenance and taxes =35,000 each year Building will be after 2 years, producing net after -tax proceeds of 610,000 after the loan is paid. Miller client, the prospective purchaser is in 35% marginal income tax bracket. The NPV of this project at 10 % discount rate, based on these estimate is A. -19,000 B. 28,000 C. 52,000 D.64,000 Appreciate if some one could answer with steps? Thanks in advanceā€¦

CF0=-500,000 CF1=28,331 CF2=637109 I=10 NPV=? CF1: (300,000-0.1*2,000,000-60,000-35,000)*(0.65)=3250 3250+60,000-(234,919-200,000)=28,331 Liability outstanding: 2,000,000-34,919=1,965,081 CF2: (300,000-0.1*1,965,081-95,000)*(0.65)=5520 5520+60,000-(234,919-196,508)=27109 add the 610,000 gives you an CF2=637109 Answer C

barthezz, why do we need to deduct the principal repayment from CF1 and CF2? Thanks.

>CF1: (300,000-0.1*2,000,000-60,000-35,000)*(0.65)=3250 This gives you 3250 net income - but NPV works off cash flows, so we need to adjust, just like in the indirect method in FSA >3250+60,000-(234,919-200,000)=28,331 This is NI + depreciation - decrease in loan