DSquaredSlim

Answers to help:

A

(NOI - Dep. - Interest paid) * marginal tax rate = Income tax payable

N = 360
I = 8/12
PV = 393,750
PMT = 2,889.20

Interest Yr 1 = 31,381
Yr 2 = 31,108
Yr 3 = 30,812
Yr 4 = 30,492

Yr 1 5839.15 (64,000 – 16,399 – 31,381) * 0.36
Yr 2 7089.43 (64,000 – 16,399 – 31,108) * 0.36
Yr 3 8405.47
Yr 4 9790.83


B

NOI - Debt service - Tax payable (from A) = ATCF
where Debt service = Mortgage payment x 12 2889.2 * 12 = 34,670.38

Yr 1 = 23,491 (64,000 – 34,670.38 – 5,839.15)
Yr 2 = 25,441
Yr 3 = 27,484
Yr 4 = 29,627

C

CAPITAL GAINS:
(Sales price - Selling costs) - (Purchase price - Accumulated dep.) - Recaptured dep*

(777,924 - (777,924 * 0.07)) - (525,000 - 65,596) - 65,596 = 198,469

*property appreciates over holding period, depreciation must be recaptured

TAXES:
Tax on capital gain:
198,469 * 0.20 = 39,694

Tax on recap depreciation:
65,596 * 0.25 = 16,399

Total taxes due on sale:
16,399 + 39,694 = 56,093

AFTER TAX EQUITY REVERSION:
Sales price - Selling expenses - Balance on debt - Total taxes due on sale

777,924 - (777,924 * 0.07) - 344,607 - 56,093 = 288,514

D

Yr 1 23,491 / 1.12
Yr 2 25,441 / (1.12)^2
Yr 3 27,484 / (1.12)^3
Yr 4 (29,627 + 288,514) / (1.12)^4

Sum: 263,022.44
Equity outlay: 131,250
NPV: 131,752.44

E. Use calculator to obtain IRR ~ 37.14%

F. Decision is to buy based on NPV and IRR, which are greater than zero and 12%, respectively.