On May 25, 2015, John Rebel acquired a commercial building as a short term inves

Question

On May 25, 2015, John Rebel acquired a commercial building as a short term investment. He paid $1,900,000 for it, of which $240,000 was the value of the land it was on. He plans to sell the property in July 2018 at an estimated price of $2,400,000. During the ownership, he will lease out the building for $190,000 per year. The prorated lease revenues for the years 2015 and 2018 are $110,833 and $95,000, respectively. Using the MACRS method of depreciation for tax purposes, determine the after-tax cash flows for each of the years he owns the building, including theafter-tax cash flow from sale of the building in 2018. Note that the income tax rate for John is 30% and the capital gain tax rate is 15%.

The ATCF from the rental income for the year 2015 = $

The ATCF from the rental income for the year 2016 = $

The ATCF from the rental income for the year 2017 = $

The ATCF from the rental income for the year 2018 = $

The ATCF from the sale of the property in 2018 = $

(Round to the nearest dollar for all)

Explanation / Answer

MACRS recovery rates for commercial buildings 2015 1.605% (placed in service in May) 2016 2.564% 2017 2.564% 2018 2.564% Total recovery till sale 9.297% May 25,2015 Total cost 1900000 Less: Cost of land 240000 So,cost of Building = 1660000 The ATCF from the rental income for the year 2015 = After-tax Rental income =110833*(1-30%) 77583 Depn. Tax shields1660000*1.605% 26643 Total after-tax cash flow 104226 The ATCF from the rental income for the year 2016 = After-tax Rental income =190000*(1-30%) 133000 Depn. Tax shields1660000*2.564% 42562 Total after-tax cash flow 175562 The ATCF from the rental income for the year 2017 = After-tax Rental income =190000*(1-30%) 133000 Depn. Tax shields1660000*2.564% 42562 Total after-tax cash flow 175562 The ATCF from the rental income for the year 2018 = After-tax Rental income =95000*(1-30%) 66500 Depn. Tax shields1660000*2.564% 42562 Total after-tax cash flow 109062 The ATCF from the sale of the property in 2018 = Acquisition cost (Land+Bldg.) 1900000 Costs recovered thro' depn.(9.297%*1660000) 154330 Carrying value 1745670 Sale value 2400000 Gain on sale(sale value-carrying Value) 654330 Capital gain tax at 15%*654330= 98150 So, after tax proceeds from sale of property=2400000-98150= 2301850

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