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The following information applies to Questions 13 and 14: Net Operating Income:

ID: 2789995 • Letter: T

Question

The following information applies to Questions 13 and 14:

Net Operating Income: $14,000

Depreciation: $4,000

Debt Service: $13,000 (interest is $12,000 of this amount)

Vacancy and Credit Loss: $7,000

Interest Expense: $12,000

Operating Expenses: $3,000

Tax rate: 28%

13. Assuming that the investor can use any tax shelter benefits, what are the taxes due or the taxes saved ($$$) for these annual figures?

14. Assuming that the investor can use any tax shelter benefits, what is the cash flow after taxes?

Explanation / Answer

Net Operating Income: $14,000

Depreciation: $4,000

Interest Expense: $12,000

Tax rate: 28%

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Taxes saved = (Net Operating Income - Depreciation - Interest) * tax rate

= ($14000 - $4000 - $12000) * 28% = -$2000 * 0.28 = -$560

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Before Tax cashflow = Net Operating Income - Debt Service = $14000 - $13000 = $1000

Cashflow after taxes = Before Tax cashflow - Taxes = $1000 - (-$560) = $1000 + $560 = $1560

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