Question: (APV Decision Rule) A seller has offered you a $1,500,000 interest-only seven-year loan at 6% (annual payments), when market interest rates on such loans are 7%. You face a 35% marginal income tax rate.
a. Basing your decision on market values, how much more should you be willing to pay for the property than you otherwise think it is worth, due to the financing offer?
b. Answer the same question only now basing your answer on investment value rather than market value. You may assume that the investor is typical of the marginal investors in the property market, and faces a tax rate similar to that of marginal investors in the bond market.