Select one: a. CFBT in year 3 is 250,000 b. Depreciation charge in years 1-3 = 1
ID: 2483352 • Letter: S
Question
Select one:
a. CFBT in year 3 is 250,000
b. Depreciation charge in years 1-3 = 150,000
c. BV in year 2 = 3,150,000
d. CFAT in year 2 = 298,000 and BV in year 2 is 2,625,000
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.Explanation / Answer
An Engineer Co-Owner Purchased cost of Apartment $ 3,500,000.00 Gross Income $ 480,000.00 Expenses $ 100,000.00 Less: Deprecation $ 175,000.00 Net Income $ 205,000.00 Less Income Tax $ 82,000.00 Profit after tax $ 123,000.00 Add: Depreciation $ 175,000.00 Net Operating Cash Flow $ 298,000.00 Answer (c ) is correct Purchase Cost $ 3,500,000.00 Less: Depreciation in Ist Year $ 175,000.00 Book Value in the first year $ 3,325,000.00 Book value or WDV beginning of 2nd year $ 3,325,000.00 Less: Depreciation in the 2nd year $ 175,000.00 Book value or WDV at the end of 2nd year $ 3,150,000.00 Ans (a) is incorrect because CFBT in year 3 is same as in year 1 Which is $ 205,000.00 Ans (b) is incorrect because depreciation charge in year(1-3 Y) is $ 525,000.00 Ans (d) is partly correct CFAT in year second is same as in year 1 which is $298000 but Book value in year 2nd is $ 3,150,000.00
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