Instructions Please use this page to enter the numerical values asked for in the
ID: 2722045 • Letter: I
Question
Instructions Please use this page to enter the numerical values asked for in the table. Turn in this page of the exam to the Instructor together with any additional pages you might use for your solution. Write a detailed solution, starting with the general symbols, replacing them by numerical values, and showing all intermediate steps of calculations. You will receive partial credit, thus the detailed solution is a must. Just final answers will not be accepted. If you need additional pages use your own. Write your name, the class MSE304 on-campus SP16 Quiz #4 in the upper right corner of each page, and put page numbers, page number out of which pages you turn in in all, e.g. page 3 of 4. The test is open-book, open notes. No computers and/or cell-phones are allowed. No communication with your colleagues is allowed. You have 35 minutes. An engineer co-owns a real estate rental property business, which just purchased an apartment complex for $3,500,000 using all equity capital. For the next 8 years, an annual gross income before taxes of $480,000 is expected, offset by estimated annual expenses of $100,000. The owners hope to sell the property after 8 years for the currently appraised value of $4,530,000. The applicable tax rate for ordinary taxable income is 40%. The property will be straight line depreciated over a 20-year life with a salvage value of zero. Neglect the half-year convention in depreciation computations. Step-by-step computation procedure for values in part a): TIs: Taxes_5: CFBT_5: BV_5: CFBT_8 Find the following numerical values for year t=5: Tl_5: Taxess: CFBT_5: & CFBT_8: BV_5: Enter the numerical values above but also show below the step-by-step procedure of how you obtained the respective values below (part c). Write the column of the CFAT of years 1-8; consider the 1^st cost in year 0, and find the ROR after-tax from the CFAT values (draw the CFD and the necessary equation). Use interpolation to find the exact value of the internal ROR of CFAT.Explanation / Answer
Cost of apartment complex $3,500,000 Cash Inflow Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Gross Income Before Depreciation & Tax $480,000 $480,000 $480,000 $480,000 $480,000 $480,000 $480,000 $480,000 Annual Expense $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 Depreciation $175,000 $175,000 $175,000 $175,000 $175,000 $175,000 $175,000 $175,000 Profit before tax $205,000 $205,000 $205,000 $205,000 $205,000 $205,000 $205,000 $205,000 Tax @40% $82,000 $82,000 $82,000 $82,000 $82,000 $82,000 $82,000 $82,000 Profit after tax $123,000 $123,000 $123,000 $123,000 $123,000 $123,000 $123,000 $123,000 Add : - depreciation $175,000 $175,000 $175,000 $175,000 $175,000 $175,000 $175,000 $175,000 Sale of property - after tax $1,458,000 CFAT $298,000 $298,000 $298,000 $298,000 $298,000 $298,000 $298,000 $1,581,000 CFBT $380,000 $380,000 $380,000 $380,000 $380,000 $380,000 $380,000 $380,000 Sale of property - before tax $2,430,000 $380,000 $380,000 $380,000 $380,000 $380,000 $380,000 $380,000 $2,810,000 Average CFBT - 5 yrs $380,000 Average CFBT - 8 yrs $683,750 Average CFAT - 8 years $458,375 Average CFAT - 5 years $298,000 Calculation ROR Present value factor (Initial investment / average annula cash inflow) ( 3500000/458375) Present value factor 7.6357 Pv vaue of cash inflow = present value of cash outflow Cost of property $3,500,000 Less depreciation of 8 years $1,400,000 Written down value of the property $2,100,000 Sale value $4,530,000 gain on sale $2,430,000 Tax 40% $972,000 Sale vaule after tax $1,458,000 calulation of depreciation (total value of property - salvage value )/No. of useful life ((3500000-0)/20) ie depreciation per year $175,000