On April 22?, 2015, John acquired a commercial building as a short term investme

Question

On April 22?, 2015, John acquired a commercial building as a short term investment. He paid ?$1,700,000 for? it, of which $300,000 was the value of the land it was on. He plans to sell the property in July 2018 at an estimated price of $2,200,000. During the? onwership, he will lease out the building for $190,000 per year. The prorated lease revenues for the years 2015 and 2018 are $126,667 and $95,000?, respectively. Using the MACRS method of depreciation for tax? purpouses, determine the after-tax cash flows for each of the years he owns the? building, including the? after-tax cash flow from sale of the building in 2018. Note that the income tax rate rate for John is 33?% and the capital gain tax rate is 15?%.

Explanation / Answer

Cost of building on April22, 2015 $1,700,000 Cost of land $300,000 Cost of building $1,400,000 Annual Depreciation of the building=1400000/39 $35,897 Depreciation in 2015=43590*(8.5 months/12) $25,427 Depreciation in 2018=43590*(6.5 months/12) $19,444 A B=A*0.33 Year Depreciation Depreciation tax shield 2015 $25,427 $8,391 2016 $35,897 $11,846 2017 $35,897 $11,846 2018 $19,444 $6,417 A B=A*(1-0.33) Before tax lease revenue After tax lease revenue 2015 $126,667 $84,867 2016 $190,000 $127,300 2017 $190,000 $127,300 2018 $95,000 $63,650 Sales Price in 2018 $2,200,000 Capital gain=(2200000-1700000) $500,000 Capital gain tax=(0.15*500000) $75,000 After tax cash flow from sales(2200000-75000) $2,125,000 AFTER TAX CASH FLOW OF EACH YEAR A B C D E=A+B+C+D Year Initial cost Lease Revenue Depreciation tax shield Cashflow from sales Net After tax cash flow 0 ($1,700,000) ($1,700,000) 1 $84,867 $8,391 $93,258 2 $127,300 $11,846 $139,146 3 $127,300 $11,846 $139,146 4 $63,650 $6,417 $2,125,000 $2,195,067 Year After tax cash flow 0 ($1,700,000) 1 $93,258 2 $139,146 3 $139,146 4 $2,195,067

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