Assume you are considering investing in an apartment building with the following estimated financial characteristics:
The year-2 and year-3 cash flow after taxes is closest to:
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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
Assume you are considering investing in an apartment building with the following estimated financial characteristics:
The net present value (NPV) and internal rate of return (IRR) for this investment are closest to:
NPV
IRR
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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. 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. = 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]
First, compute taxes.
Long-term capital gain tax = capital gains tax rate x (total gain - recaptured depreciation)
-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%
Suppose you are evaluating an investment opportunity in an office building for which you have estimated the following financial characteristics:
The cash flows after taxes for years one and four are closest to:
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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
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:
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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
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