After-tax cash flow

Cost of any loan = 8%
Loan amortization = 20 years (with annual payments)
Equity contribution = $1,000,000
Loan-to-value ratio = 75%

Required rate of return = 11%

Total value = $1,000,000/(1-75%)= $4,000,000
Debt = Total value - Equity = $4,000,000 - $1,000,000 = $3,000,000

After-tax cash flow

Year	Operating income	Tax payable	Annual debt service	After-tax cash flow	PV after tax cash flow
1	$400,000	$40,000	$305,557 (*1)	54,443 (*4)	49,047.75 (*8)
2	$420,000	$42,000	$305,557 (*1)	72,443 (*2)	58,796.36 (*9)
3	$441,000	$44,000	$305,557 (*1)	91,443 (*5)	66,862.33 (*10)
4	$463,000	$46,000	$305,557 (*1)	111,443 (*6)	73,410.96 (*11)
5	$486,000	$49,000	$305,557 (*1)	131,443 (*7)	78,005.02 (*12)
ERAT (*3)	$2,000,000			2,000,000	1,186,902.66 (*13)

(*1)
20 N
8 I/Y
3,000,000 PV
0 FV
CPT PMT -305,557

(*2) $420,000 - $42,000 - $305,557 = 72,443

(*3) After-tax equity reversion or called as Equity Reversion After-Tax (ERAT)

(*4) 400,000 - 40,000 - 305,557 = 54,443
(*5) 441,000 - 44,000 - 305,557 = 91,443
(*6) 463,000 - 46,000 - 305,557 = 111,443
(*7) 486,000 - 49,000 - 305,557 = 131,443

(*8) 54,443/(1+11%)^1 = 49,047.75

(*9) 72,443/(1+11%)^2 = 58,796.36

(*10) 91,443/(1+11%)^3 = 66,862.33

(*11) 111,443/(1+11%)^4 = 73,410.96

(*12) 131,443/(1+11%)^5 = 78,005.02

(*13)2,000,000/(1+11%)^5 =1,186,902.66

NPV = (49,047.75 + 58,796.36 + 66,862.33 + 73,410.96 + 78,005.02 + 1,186,902.66) - 1,000,000 = 513,025.08 > 0

In this case, the NPV is positive and, therefore, the IRR must be greater than the required rate of return of 11%.

CF

CF0 -1,000,000

C01 54,443

C02 72,443

C03 91,443

C04 111,443

C05 131,443+2,000,000 = 2,131,443

IRR CPT 21.5268% > 11%