You are considering the acquisition of a small office building. The purchase price is $775,000. Seventy-five percent of the purchase price can be borrowed with a 30-year, fully amortized mortgage with a 7.5% interest rate. Payments will be made annually. Up-front financing cost will total 3% of the loan amount. The expected before-tax cash flows from operations, assuming a 5-year holding period, are as follows:
Year BTCF
1 $48,492
2 $53,768
3 $59,282
4 $65,043
5 $71,058
The BTCF from the sale of the property is expected to be $295,050.
a) What is the net present value (NPV) of this investment assuming a 12% required rate of return on levered cash flows?
b) What is the levered internal rate of return?