I did not understand how to calculate the after-tax CF in a real-estate Investment : Computing after-tax cash flow (it is in the schweser Book 5 p256): An investor is considering the purchase of a small office building and the NOI is 197 500 . He purchase the building for 1 850 000, putting down 20% cash (370 000$) and financing the remainder with a long-term morgage at a rate of 10%. The annual payments on the morgage are 156 997, and the interset portion is fully deductible for income tax purposes. The investor's marginal income tax rate is 28%. Depreciation per year, using the SL method, is estimated to be 45 000 per year. Calculate the after-tax CF. Thx/
debt= 1,850,000*.8(as investor is put down 20% cash , so left is debt,i.e,80%) =1480000 interest rate = 10% so montgly payment= 1480000*.1=148000- step1 annual payment is given as 156997 after tax net income = NOI- DEPRECIATION -interest-TAX=197,500-45000(as calculated in last problem)-148000(as calculated in step 1)-(1-.28)(28% is tax rate)=3240 after tax cash flow (add depreciation back- principal component of mortgare for year 1)=3240+45000-8997(annual payment(156997)- interest(148000)=39243–step2 -------------------------------------------------------------------------------------------------- year 2: 1850000-39243(as calculated in step 2)=1810757 1810757*.8(amount of debt)=1448606*.1(interest rate)=144860.6 --step 3 noi-depreciation-interest*(-marginal tax)= 197500-45000-144860(interest, as calculated in step3)*(1-.28)=5500.397 adding back depreciation to get after tax cash flow= 5500.397+45000-12136.44(annual payment on mortgage - interest= 156997-144860.6)=38363 -------------------------------------------------------------------------------------------- year 3=1,950,000-1,450,000=540000 given rate of equity = 10% so P.V= 39243/1.1 + 38363/1.1*1.1 + 540000/1.1*1.1*1.1=473090.4057-- step 4 NPV= PV- INITIAL INVESTMENT = 473090.4057- 370000(1,850,000*.2)= 103,090.4057 i think this helps, however my answer is slightly diferent from schwser (npv=102649 and mine is 103,090.40)
Thanks! Here is what in the book. However I do not understand the calculation very well, esp the CF for Y3. If Three years forward, the investor plans to sell the building for 1 950 000. The remaining mortgage balance at payoff is 1 450 000 Assume that the COE is 10% and thus the Net CF for the investment is as below (how to calculate these CF esp the Y3?): Year 1: 39 243 Year 2: 38 991 Year 3: 538 721 (year of sale, net of morgage payoff, no capital gains tax)
hello mate, did you understand the calculations for year 1 and year2 , as that is the main concept(i think) . year 3 calculation=1,950,000-1,450,000(remaining mortgage)=540,000( schwser calculation is bit different , even i do not understand how they got 538,721) once you got 540,000, discount it to present value and deduct from your own equity which was 20% of 1,850,000.
I understand the calculation for Y1 and Y2. For Y3, I calculate as below: Using the same calculation as Y1 and Y2 I get 197 500-146 110.63 (interest component of the morgage)- 45 000 = 6 389.37, *(1-.28)=4 600.35, +45 000-10 886.37 (principal component of the morgage=38 713.98 1 950 000- 1 450 000= 500 000 If I add 500 000 and 38 713.98, it is 538 713.98 for Y3 i/o 538 721, have I made any mistake in the previous calculation?