Question

What is the before-tax internal rate of return, if purchased at the list price, based on the following assumptions?

Assumptions

• List Price - $500,000
• First-year net operating income - $40,000
• Annual growth rate of net operating income - 2.00%
• Property annual appreciation - 2.00%
• Holding period - 3 years
• Sale expenses - None

1 8%

2 9%

3 10%

4. 11%

Answer 1

-500000+40000/(1+IRR)+40000*1.02/(1+IRR)^2+40000*1.02^2/(1+IRR)^3+500000*1.02^3/(1+IRR)^3=0

=>IRR=10.0000%