Question

Given the following information, please calculate after tax cash flow for year 1. Assuming a sales price of $1,100,000, please calculate the after tax cash flow from the sale (don’t forget the depreciation recapture.) Finally, calculate the after tax IRR for the investment.

Purchase Price: $900,000

Loan: $750,000, 5%, 25 years (annual payments)

Year 1 NOI: $100,000

Year 2 ATCF: $33,000

Year 3 ATCF: $34,000

Use an 85/15 ratio for depreciation. 39 year, straight line.

35% tax rate on income, 15% on long term capital gains, 25% depreciation recapture.

1. What is the annual loan payment?

2. What is the annual depreciation expense?

3. What is the after tax cash flow (ATCF) for year 1?

4. What is the after tax cash flow from the sale at the end of year 3?

5. What is the IRR of the investment?

Answer 1

1) Annual payment = ( $750,000/PVAF 5% , 25yr) = $53214.34

2)Annual Depreciation expenses = ($900,000 × 0.85 / 39)

= $ 19,615

3). NOI - $ 100,000

Less Depn - $19615

Less Interest - $53214.34

EBT - $ 27,170.66

Less Tax @35 - $ 9510

EAT - $ 17,660

Add. Depn - $ 19615

ATCF - $ 37275

4)Adjusted Cost of machine on year 3 - ($900,000 - {19615×3}) = $841,155

Depreciation recapture = 25%

Thus sales value is ($841,155 × 1.25 ) = $1051443.75

Less LTCG @15% = 31543

ATCF from Sale on Year 3 = $1,019,900