An investor has owned a property for five years. A property could be sold today for $2 million. It has a loan balance of $ 1 million and, if sold, the investor would incur a total of $250,000 in taxes (capital gains tax + depreciation recapture tax). The investor has determined that if it were sold today, she would have earned an IRR of 15% on equity for the past five years. If not sold, the property is expected to produce after tax cash flow of $50,000 over the next two years. At the end of the two years, the property value is expected to increase to $2.1 million, the loan balance will decrease to $900,000. If sold after two years, the investor would incur a total of $255,000 in taxes. A. What is the incremental internal rate of return for keeping the property two additional years?
B. The investor has an outside investment opportunity that is expected to earn him a rate of return of 15%. What advice would you give the investor?