after-tax cash flow question

here’s a tough question ----------------------------------------------------------------------- An analyst gathered the following information about a rental property: Value of property using the income approach $300,000 Capitalization rate 14% Annual depreciation $13,000 Annual payment on mortgage $39,100 Annual interest on mortgage $37,500 For an investor whose marginal tax rate is 30 percent, the investor’s after-tax cash flow for the year is closest to: A. –$7,550. B. $350. C. $2,900. D. $5,450.

So Principal payment = 39100 - 37500 = 1600 300000 * .14 = 42000 NOI - 13000 Depr - 37500 Int ========= -8500 Before Tax Tax = -2550 ======== AT -5950 Add Depr 13000 principal (1600) =========== Total AT CF = 5450

CP, Why do you increase CF by the tax credit (-2550). Last I checked, the govt. doesn’t write someone a check because they showed a loss (that would be too easy). They may very well have a tax-loss carryforward as a result of the loss but that only has an implication on future cash flow. I think the answer is C: 42000 - 39100 = 2900

CPK I got the same answer as you. Take the NOI, which is 14% of 300,000. The result is $42,000. Subtract Depreciation and Interest. Net loss is $8,500. Tax credit is 30%, which is $2,550. Start back at NOI, which includes depreciation. Add back the tax credit. Then subtract the entire mortgage payment, since that represents a cash outflow. You end up with 42,000 + 2,550 - 39,100 = 5,450. Alternatively you could take after tax net income of -$5,950, add back depreciation, and subtract principal, which yields -5,950 + 13,000 - 1,600 = 5,450.

I am assuming NOI = Net operating income. Why is the amount capitalized referred to as an income?

one pal showed me another common sense method to solve this kind of question: in this deal total cash inflow:42,000 rental income total outflow:39,100 payment on mortgage tax payment: -2,550 (tax refund) after tax cashflow=inflows-outflows= 42,000-39,100-(-2,550)=5,450 this is easy understood, no need to think about concept of NOI.