Question
An office building generates the cash flows listed below. The owner is considering spending $55,000 to renovate the building. The renovations will change the cash
An office building generates the cash flows listed below. The owner is considering spending $55,000 to renovate the building. The renovations will change the cash flows as listed below. Calculate the after-tax internal rate of return on the renovations where the owner plans to sell the building in 3 more years. Should the owner renovate the property if an alternative investment yields 10%?
| No renovations |
|
|
| |
|
| Year |
|
| |
|
| 1 | 2 | 3 | |
| NOI | 75,000 | 78,750 | 80,325 | |
| Less debt service | 44,671 | 44,671 | 44,671 | |
| BTCF | 30,329 | 34,079 | 35,654 | |
|
|
|
|
| |
| NOI | 75,000 | 78,750 | 80,325 | |
| Less interest | 23,575 | 21,824 | 19,923 | |
| Depreciation | 16,542 | 16,542 | 16,542 | |
| Taxable income | 34,883 | 40,384 | 43,860 | |
| Tax | 11,860 | 13,731 | 14,912 | |
| ATCF | 18,469 | 20,348 | 20,742 | |
| ATCF from sale |
|
| 274,291 | |
|
|
|
|
| |
| With renovations |
|
| ||
|
| Year |
|
| |
|
| 1 | 2 | 3 | |
| NOI | 85,000 | 90,950 | 95,498 | |
| Less debt service | 44,671 | 44,671 | 44,671 | |
| BTCF | 40,329 | 46,279 | 50,827 | |
|
|
|
|
| |
| NOI | 85,000 | 90,950 | 95,498 | |
| Less interest | 23,575 | 21,824 | 19,923 | |
| Depreciation | 16,542 | 16,542 | 16,542 | |
| Taxable income | 44,883 | 52,584 | 59,033 | |
| Tax | 15,260 | 17,879 | 20,071 | |
| ATCF | 25,069 | 28,400 | 30,755 | |
| ATCF from sale |
|
| 314,291 | |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Advanced Accounting
Authors: Joe Hoyle, Thomas Schaefer, Timothy Doupnik
10th edition
0-07-794127-6, 978-0-07-79412, 978-0077431808
