More Real Estate Valuation

Can you tell I’m on alt investments. Property expected to generate revenue of \$100,000. The expense in the first year is \$25,000 and the depreciation allowance will be 2.5 percent of the \$250,000 initial investment. Assuming all cash flows occur at the end of the year and Biggs expects to be in a 35 percent marginal tax bracket, the after-tax cash flow in year 1 is?

under NOI (100000 - 25000 - 2.5*250000)*.65 + 2.5*250000

Is it [\$100,000 - \$25,000 - \$250,000(.025)] * .65 = \$44,687.5?

= [100k-25k-(2.5% of 250k)]*0.65+2.5% of 250k

NOI = Operating income - Operating expenses (excluding depreciation and financing costs)=X After-tax CF = X(1-0.35)

Everyone is making the same mistake I did too. Remember this is cash flows and not net income… this about what you do with depreciation.

Oops, forgot to add depreciation expense back in.

saurya_s Wrote: ------------------------------------------------------- > = [100k-25k-(2.5% of 250k)]*0.65+2.5% of 250k I agree, you add back the depreciation because it doesn’t affect your final cash flow. Only reason why you subtract at the beginning is to account the treatment of it for the income taxes.

the key piece here is remembering to include depreciation in calculating the taxable income and therefore tax expense - and to then add depreciation back to the after tax earnings because it is not a cash item

mcf Wrote: ------------------------------------------------------- > Everyone is making the same mistake I did too. > > Remember this is cash flows and not net income… > this about what you do with depreciation. ouch! please show us the way

assuming this is not financed i would say… (100-25-6.25)(.65) = 44.7 the after tax cash flow = NI + Depn - Principal Paydown…with no finance costs in this question, the ATCF = 44.7+6.25= 51

Property expected to generate revenue of \$100,000. The expense in the first year is \$25,000 and the depreciation allowance will be 2.5 percent of the \$250,000 initial investment. Assuming all cash flows occur at the end of the year and Biggs expects to be in a 35 percent marginal tax bracket, the after-tax cash flow in year 1 is? 100000 - 25000 - (.025 * 250000) = 68750 68750 * (1-.35) = 44687.50 44687.5 + (.025 * 250000) = \$50,937.50

umm… looking back, looks like that’s what I did.

You did.