Reading 45: Investment Analysis-LOS c 习题精选 investing, following, Investment, div

土豆妮

Session 13: Alternative Asset Valuation
Reading 45: Investment Analysis

LOS c: Calculate the after-tax cash flow and the after-tax equity reversion from real estate properties.

 

 

 

Assume you are considering investing in an apartment building with the following estimated financial characteristics:

• Net operating income (NOI) = $60,000.
• Net operating income growth rate = 5% per year.
• Tax depreciation = $10,000 per year.
• Annual interest expense = $9,000.
• Annual debt service expense = $12,000.
• Equity investors marginal income tax rate = 36%.
• Investment horizon = four years.

The year-2 and year-3 cash flow after taxes is closest to:

A) CFAT2 = $31,600 and CFAT3 = $33,400.

B) CFAT2 = $33,240 and CFAT3 = $37,176.

C) CFAT2 = $35,160 and CFAT3 = $37,176.

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Taxes Payable Computation:
	Year-1	Year-2	Year-3	Year-4
NOI (g = 5%)	$60,000	$63,000	$66,150	$69,458
Less depreciation	(10,000)	(10,000)	(10,000)	(10,000)
Less interest	(9,000)	(9,000)	(9,000)	(9,000)
Taxable income	41,000	44,000	47,150	50,458
times tax rate	′0.36	′0.36	′0.36	′0.36
Income taxes payable	$14,760	$15,840	$16,974	$18,165
CFATt Computation:
	Year-1	Year-2	Year-3	Year-3
NOI (g = 5%)	$60,000	$63,000	$66,150	$69,458
Less debt service	(12,000)	(12,000)	(12,000)	(12,000)
Before tax cash flow	$48,000	$51,000	$54,150	$57,458
Less taxes payable	(14,760)	(15,840)	(16,974)	(18,165)
CFAT	$33,240	$35,160	$37,176	$39,293

土豆妮

Assume you are considering investing in an apartment building with the following estimated financial characteristics:

• Net operating income (NOI) = $64,000.
• Net operating income growth rate = 4% per year.
• Tax depreciation = $25,000 per year.
• Annual interest expense = $32,000.
• Annual debt service expense = $35,000.
• Equity investors marginal income tax rate = 36%.
• Investment horizon = 2 years.
• Net purchase price = $500,000.
• Equity investment = 30%.
• Gross sale price = $650,000.
• Cost of sale = $50,000.
• Outstanding mortgage balance at time of sale = $385,000.
• The tax rate on recaptured depreciation = 28%.
• Long-term capital gains tax rate = 20%.
• Required after tax return on equity = 6%.

The net present value (NPV) and internal rate of return (IRR) for this investment are closest to:

NPV

IRR

A) $51,977 19%

B) $61,095 27%

C) $99,994 47%

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Taxes Payable Computation:
	Year-1	Year-2
NOI (g = 4%)	$64,000	$66,560
Less depreciation	(25,000)	(25,000)
Less interest	(32,000)	(32,000)
Taxable income	7,000	9,560
times tax rate	0.36	0.36
Income taxes payable	$2,520	$3,442
Cash flow after taxes (CFAT) Computation:
	Year-1	Year-2
NOI (g = 4%)	$64,000	$66,560
Less debt service	(35,000)	(35,000)
Before tax cash flow	$29,000	$31,560
Less taxes payable	(2,520)	(3,442)
CFAT	$26,480	$28,118

Equity reversion after taxes (ERAT) = net selling price – mortgage balance – taxes.

First, compute taxes.

Recaptured depreciation = 2 × $25,000 = $50,000

Tax on recaptured depreciation = $50,000 × 0.28 = $14,000

Total gain on sale = net selling price – adjusted basis

Net selling price = sales price – cost of sale = $650,000 ? 50,000 = $600,000

Adjusted basis = cost - accumulated depreciation = $500,000 ? 50,000 = $450,000

Total gain = $600,000 ? 450,000 = $150,000.

Long-term capital gain tax = capital gains tax rate x (total gain - recaptured depreciation)

= 0.20 × (150,000 ? 50,000) = 0.20 × 100,000 = $20,000

Total taxes payable = tax on recaptured depreciation + long-term capital gains tax

= $14,000 + $20,000 = $34,000

ERAT = net selling price – mortgage balance – taxes.

= 600,000 ? 385,000 ? 34,000 = $181,000

Relevant Cash Flows

Year	0	1	2
EI*	-$150,000
CFATt		$26,480	$28,118
ERAT			$181,000

^*Equity investment = 0.30 × 500,000 = $150,000

Using your TI BAII Plus:

[CF] [2nd] [CLR WORK]
-150,000 [+/–] [ENTER] [↓ ]
26,480 [ENTER] [↓] [↓]
209,118 [Enter] (Note: CF₂ = 28,118 + 181,000)
[NPV] {6} [ENTER] [↓]
[CPT] = $61,095.41

[IRR] [CPT] = 27.23%

土豆妮

Suppose you are evaluating an investment opportunity in an office building for which you have estimated the following financial characteristics:

• First year net operating income (NOI) = $75,000.
• Growth rate in net operating income = 5% per year.
• Tax depreciation = $10,000 per year.
• Annual interest expense = $9,000.
• Annual total debt service expense = $12,000.
• Equity investors marginal income tax rate = 36%.
• Investment horizon = four years.

The cash flows after taxes for years one and four are closest to:

A) CFAT1 = $51,480 and CFAT4 = $50,766.

B) CFAT1 = $42,840 and CFAT4 = $50,406.

C) CFAT = $42,840 and CFAT4 = $47,760.

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Taxes Payable Computation:
	Year-1	Year-2	Year-3	Year-4
NOI (g = 5%)	$75,000	$78,750	$82,688	$86,822
Less depreciation	(10,000)	(10,000)	(10,000)	(10,000)
Less interest	(9,000)	(9,000)	(9,000)	(9,000)
Taxable income	$56,000	$59,750	$63,688	$67,822
times tax rate	′0.36	′0.36	′0.36	′0.36
Income taxes payable	$20,160	$21,510	$22,928	$24,416
CFATt Computation:
	Year-1	Year-2	Year-3	Year-3
NOI (g = 5%)	$75,000	$78,750	$82,688	$86,822
Less debt service	(12,000)	(12,000)	(12,000)	(12,000)
Before tax cash flow	$63,000	$66,750	$70,688	$74,822
Less taxes payable	(20,160)	(21,510)	(22,928)	(24,416)
CFAT	$42,840	$45,240	$47,760	$50,406

土豆妮

A property was purchased for $550,000 and sold after six years for $850,000. Costs associated with the sale were $65,000 and the tax depreciation in each year was $20,000. At the time of the sale, $320,000 remained outstanding on the mortgage. The tax rate on recaptured depreciation is 28% and the long-term capital gains tax rate is 20%. The equity reversion after taxes for this property is closest to:

A) $384,400.

B) $365,600.

C) $449,400.

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Equity reversion after taxes (ERAT) = net selling price – mortgage balance – taxes.

First, compute taxes.

Recaptured depreciation = 6 × $20,000 = $120,000

Tax on recaptured depreciation = $120,000 ′ 0.28 = $33,600

Total gain on sale = net selling price – adjusted basis

Net selling price = sales price – cost of sale= $850,000 - 65,000 = $785,000

Adjusted basis = cost - accumulated depreciation = $550,000 - 120,000 = $430,000

Total gain = $785,000 - 430,000 = $355,000.

long-term capital gains tax

= capital gains tax rate × (total gain - recaptured depreciation) = 0.20 × (355,000 – 120,000) = 0.20 × 235,000 = $47,000

Total taxes payable

= tax on recaptured depreciation + tax on long-term capital gains = $33,600 + $47,000 = $80,600

ERAT = net selling price – mortgage balance – taxes = 785,000 - 320,000 - 80,600 = $384,400