Biggs, Inc. is considering a real estate investment that provides gross revenue (if fully occupied) of $250k, a vacancy rate of 4%, and operating costs of 15k. The property costs $1 Million, and the depreciation expense on the property is 2.6% of the cost in the first yr and 1.3% of the cost over the next several years. The marginal tax rate is 35%. The after-tax cash flow in yr 1 from the potential investment is: A. $69,650 B. $128,350 C. $146,250 D. $155,350
to be honest, I would make sure all my other work was correct before I did this one…
Well I took the test yesterday and I’m reviewing it today. This is actually the last question to be reviewed. Question #120! lol
d. 250000*.96-15000-26000=199000 199000*.65= 129350+26000=155,350
hmm so you minus our depreciation then add it back in after you calc tax?
D. 250 X . 96 = 240000 240000 - 15000 - 26000 X (1-.35) = 129350 129350 +26000 = 155350
yeah because its a non cash transaction and isnt used when valuating real estate
Then why bother subtracting it to begin with?
i dont know the exact reason why, But I know it needs to be taken into consideration for tax purpose
you save taxes that way. Thats why ALL the companies deduct depreciation in their income statements and add it back to cash flow statement.
Makes sense, thank you all
I thought in GAAP the firm has the option to capitalize not mandatory, guess I was wrong. Does the firm have the option for IFRS?