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You are considering an investment into an income producing property (lets call it Property A). The acquisition price is $227,500 and you can finance it

You are considering an investment into an income producing property (lets call it Property A). The acquisition price is $227,500 and you can finance it with a 70% loan to value ratio mortgage with a 6% annual interest rate. This will be a fixed-rate mortgage with constant monthly The broker provides you with the following (incomplete) information about Property A. You determine that you will make this investment if it yields an after-tax internal rate of return on equity which is greater than 12%. You determine that you will hold Property A for three years and then sell at the end of year 3. The annual depreciation deduction you can claim on the property is $5,833.

You do not expect to make any capital expenditures.

The incomplete pro-forma for Property A appears below. Incomplete sections of the pro-forma are shaded grey.

Loan Terms

Acquisition Price $227,500 (100% of the acquisition price attributed to the structure)
Loan to value ratio 70%
Loan Amount

$159,250

Interest Rate 6% Annual Rate; Monthly compounding
Term to maturity; Amortization Term 30 years

Additional Assumptions

Annual Depreciation Deduction $5,833 (Assuming Straight line depreciation 39 years)
Ordinary Tax Rate 30%
Going-out capitalization rate 10.25%

Year 1 2 3

Effective Gross Income $35,000 $36,050 $37,132
less: Operating Expenditure $ (12,250) $(12,618) $(12,996)
less: Capital Expenditure $0 $0 $0
Net Operating Income $22,750 $23,433 $24,135
less: Debt Service $ (11,457) $(11,457) $(11,457)
Before Tax Cash Flow (Operations) $11,293 $11,975 $12,678
less: Tax Liability (A) $(2,465) $(2,715)
After Tax Cash Flow (Operations) (B) $9,510 $9,963
After Tax Cash from Sale $82,888
Total After Tax Cash Flow (C) $9,510 $92,852

Find the Tax Liability for Year 1 (ANSWER) , after tax cash flows from operations for Year 1 (ANSWER) , and Total After Tax Cash Flow for Year 1 (ANSWER)

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