Question

a building was purchased 5 years ago for 1,000000$ depreciated straight line to 100000$ (land value) over 30 years. its now worth 600000$ (including 100000$ land). the project requires improvement to the building of 200,000$. the improvement are depreciated straight line to zero over the life of the project. the project wil generate revenues of 325000$, 350000$, 375000$ and 400000$ for years 1-4.. Annual cahs operating expenses are 180000$, 200000$,220000$ and 240000$. the project will last 4 years at which time the building will be sold for 800000$. taxes are 40% and rate fo return is 10%. what is the total depreciation per year? show projected income statement? what is the initial cost? what is the begining and ending book value?

Answer 1

Solution:

1.Calculation of Annual depreciation

Annual depreciation=(Cost-Salvage value)/life

=Depreciation on building+Depreciaion on renovation component

=($600,000-$100,000)/25+$200,000/4

=$20,000+$50,000=$70,000

2.Projected Income statement is shown below

Year	1($)	2	3	4
Projected Revenue	325,000	350,000	375,000	400,000
Less:Operating expenses	180,000	200,000	220,000	240,000
Net revenue	145,000	150,000	155,000	160,000
Less:Annual Depreciation	70,000	70,000	70,000	70,000
Earning before tax	75,000	80,000	85,000	90,000
Less:Tax @40%	30,000	32,000	34,000	36,000
Net Income	45,000	48,000	51,000	54,000