A real estate investor is considering purchasing a sma

ll warehouse. Analysis has

resulted in

the

following facts:

The asking price is $750,000. There are 22,000 sq. ft of leasable area. The expected rent is $3.75/sq

ft per year;

rents are expected to increase at 1.5% for first two years, 2% for the next t

wo years and

3.5% in the final two years.

Since the property is leased to an AAA

-

grade tenant for 25 more years,

no vacancy factor is deducted.

The tenant will pay all operating expenses except property taxes

and insurance. These two expenses will be equal

to 18% of EGI each year.

The investor can borrow

75% of the total cost for 20 years at an interest rate of 7.75% with monthly payments and up

-

front

financing costs equal to 3.5% of the amount borrowed.

80% of the total acquisition cost is

depreciable over

the useful life of 39 years using straight

-

line depreciation method.

The investor

expects to sell the investment at the end of the year 6 and investor's ordinary income tax rate is

35%

No capital expenditures have been made since acquisition.

Co

mpute the after

-

tax cash flows from the annual rental operations over the six year period.