Real estate

Biggs Inc is considering a real estate investment that provides gross revenues(if fully occupied) of $250,000, a vacany rate of 4% and operating expenses of $15,000. The property costs $1,000,000 and the depreciation expense on the property is 2.6% of the cost in the first year and 1.3% of the cost over the next serveral years. The marginal tax rate is 35%. The after tax cash flow in the year 1 from the potential investment is A>$69,650 B>$129,350 C>$146,250 D>$155,350 Please explain your calculations.

[(250,000 * .96) - 15,000 - (1,000,000 *.026)] * (1-.35) + (1,000,000*.026) Answer is D. Remember to add back depreciation as it is a non-cash item!

= (0.96*250k-15k- 2.6%*1000k)*0.65+2.6%*1000k

D is correct