Compute the after

-

tax cash flow from the sale of the following nonresidential property.

The purchase price was $350,000.

The investor obtained a $280,

000 loan, 7.5 %

fixed rate

, 25 year

maturity

loan

There were no up

-

front financing costs.

The market value of the property increased to $420,000 over the three

-

year holding period. Selling

costs are 7% of the sales price.

The investor is in the 32% ordinary tax bracket.

Capital gains will be taxed at

15%.

Depreciation recapture taxed at 25%

The balance of the loan at the time needs to be computed.

20% of the initial purchase price represented the value of the land.

The remaining 80% has been depreciated using straight

line depreciation and a 39

year

cost

recovery period.

$25,000 in capital expenditures has been incurred since acquisition; for simplicity, however, the

capital expenditures have been added to the tax basis but not separately depreciated.

a. Compute the annual depreciation expense.

b. Compute the adjusted basis at the time of sale (after three years).

c. Compute the tax liability from sale.

d. Compute the afterntax cash flow (equity reversion) from sale.