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An analyst is assigned the task of evaluating a real estate investment project. Purchase price is...

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Finance

An analyst is assigned the task of evaluating a real estateinvestment project. Purchase price is $700,000. Using theinformation in the table below, calculate the after-tax cash flowfor the sale of the property.

After-tax cash flow without property sale

$33 546

Straight-line depreciation

$18 700

Mortgage Payment

$59 404

Cumulative Mortgage principle repayments until year 5

$20 783

80% financing at 10% interest rate

Marginal income tax rate

31%

Capital gains tax rate

20%

Forecasted sales price

$927 000

Sales expense as a % of price

6%

Answer & Explanation Solved by verified expert
4.4 Ratings (789 Votes)

Price of property $700,000
Amount of Down payment(20%) $140,000
Pv Amount of Financing (80%) $560,000
Rate interest rate 10%
Pmt Mortgage Payment $59,404
Nper Number of Years of mortgage 30 (Using Nper function of excelwith Rate=10%, Pmt=59404, Pv=-560000)
Excel Command:NPER(10%,59404,-560000)
INTEREST TAX SHIELD
Mortgage Schedule: A B C=A*10% D=B-A E=A-D F=C*31%
Year Beginning Loan Balance MortgagePayment Interest Principal Ending Loan Balance Interest Tax Shield
1 $560,000 $59,404 $56,000 $3,404 $556,596 $17,360
2 $556,596 $59,404 $55,660 $3,744 $552,852 $17,254
3 $552,852 $59,404 $55,285 $4,119 $548,733 $17,138
4 $548,733 $59,404 $54,873 $4,531 $544,202 $17,011
5 $544,202 $59,404 $54,420 $4,984 $539,218 $16,870
ANNUAL DEPRECIATION TAX SHIELD
Annual Depreciation $18,700
Depreciation tax shield $5,797 (18700*31%)
ANNUAL CASH FLOWS
Year After tax cash flow Interest tax shield Depreciation tax shield Mortgage payment Total AnnualCash Flow
1 $33,546 $17,360 $5,797 ($59,404) ($2,701)
2 $33,546 $17,254 $5,797 ($59,404) ($2,807)
3 $33,546 $17,138 $5,797 ($59,404) ($2,923)
4 $33,546 $17,011 $5,797 ($59,404) ($3,050)
5 $33,546 $16,870 $5,797 ($59,404) ($3,191)
TERMINALCASH FLOW
Forecasted Sales Price $927,000
Sales expense(6%) ($55,620)
Net Sales proceeds $871,380
Amount of Capital gain $171,380 (871380-700000)
CapitalGain Tax(20%) ($34,276)
Depreciation Recapture $93,500 (18700*5)
Income tax(31%) ($28,985)
After tax cash flow fromSales $808,119 (871380-34276-28985)
Balance Loan Payment -$539,217 (560000-20783)
Net Terminalcash Flow $268,902 (808119-539217)
YEARWISE NET CASH FLOW
N CF CF/(1.1^N)
YEAR CASH FLOW PV of CASH FLOW
0 ($140,000) ($140,000)
1 ($2,701) -$2,455
2 ($2,807) -$2,319
3 ($2,923) -$2,196
4 ($3,050) -$2,083
(-3191+268902) 5 $265,711 $164,986
SUM $15,932
Net Present value $15,932

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Transcribed Image Text

An analyst is assigned the task of evaluating a real estateinvestment project. Purchase price is $700,000. Using theinformation in the table below, calculate the after-tax cash flowfor the sale of the property.After-tax cash flow without property sale$33 546Straight-line depreciation$18 700Mortgage Payment$59 404Cumulative Mortgage principle repayments until year 5$20 78380% financing at 10% interest rateMarginal income tax rate31%Capital gains tax rate20%Forecasted sales price$927 000Sales expense as a % of price6%

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