Lu Hodler planned to buy a rental property as an investment. After looking for several months, she found an attractive duplex that could be purchased for $93,000 cash. The total expected income from renting out both sides of the duplex would be $800 per month. The total annual expenses for property taxes, repairs, gardening, and so on are estimated at $600 per year. For tax purposes, Lu plans to depreciate the building by the SOYD method, assuming that the building has a 20-year remaining life and no salvage value. Of the total $93,000 cost of the property, $84,000 represents the value of the building and $9,000 is the value of the lot (only the former can be depreciated). Assume that Lu is in the 38% incremental income tax bracket (combined state and federal taxes) throughout the 20 years. In this analysis, Lu estimates that the income and expenses will remain constant at their present levels. If she buys and holds the property for 20 years, then what after-tax ROR can she expect to receive on her investment, using the assumptions noted below?
a. The building and lot can be sold at the end of 20 years for the $9,000 estimated value of the lot.
b. A more optimistic estimate of the future value of the property is that it can be sold for $100,000 at the end of the 20 years.