Shirly Chase, a founding partner in the firm of Dean and Howe, has a prospering

Question

Shirly Chase, a founding partner in the firm of Dean and Howe, has a prospering professional practice. Chase has decided to investigate real estate as an estate-building mechanism and has asked you for advice concerning the property as descirbed below. You promptly arrange a consultation, at which time you obtain a retainer and determine the following facts:

A) Chase's earnings from her professional practice are sufficient to place her firmly in the 35% marginal income tax bracket (combined federal and state). She expects this  situation to continue into the indefinite future.     

B) Long-term capital gains are expected to be taxed at a 15% marginal tax rate

C) Chase has other investments but is in no danger of incurring liability for the alternative minimum tax.

You investigate several properties that seem to fit Chase's needs and conclude that one seems particularly well suited to her investment picture. Information on the property, an apartment building, is as follows:

* Market value (and asking price) = $2,150,000

* Next year's expected gross income = $425,000

* Next year's expected operating income = $210,000

* Building value/total property value = 0.80

* Available mortgage = $1,600,000

* Mortgage terms: 9% interest, 25-year, fully amortizing note with monthly payments and a 7-year call provision. There is no penalty for prepayment and no loan origination fee

* Operating forecast: Operating income and operating expenses alike are expected to increase at a compound annual rate of 3% for an indefinite period

* Holding period: If Chase acquires the property, she will most likely sell after 6 years and pay off balance of the mortgage note out of the sales proceeds

* The gross income multiplier, which is expected to remain constant over the transaction costs associated with disposal after 6 years (at the end of her 6th year of ownership), are expected to be about 6% of the sales price

INSTRUCTIONS: Develop a comprehensive 6-year after-tax cash-flow forecast for this property, including estimated after-tax cash from disposal.

Explanation / Answer

Please find schdule and total inflow at the end of 6th year

Inflow from sale of property at end of 6th year.

Total Inflow from this deal is

Operating cashflow for 6 years= 207,092

Cash inflow on sale of property=27,28,922

Total inflow =29,36,014

Cash Inflow Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Operating Income          210,000          216,300          222,789          229,473          236,357          243,448 Less: Interest on Mortgage          143,276          141,601          139,770          137,766          135,575          133,178            66,724            74,699            83,019            91,706          100,782          110,269 Less: Tax            23,354            26,145            29,057            32,097            35,274            38,594 Net Profit            43,371            48,554            53,963            59,609            65,508            71,675 Principal payment            17,850            19,525            21,356            23,359            25,551            27,948 Net Cash Inflow            25,521            29,030            32,607            36,250            39,957            43,728

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