Reference no: EM131810296
Albert Chan decided to buy an old duplex as an investment. After looking for several months, he found a desirable duplex that could be bought for $300,000 cash. He decided that he would rent both sides of the duplex, and determined that the total expected income would be $1500 per month. The total annual expenses for property taxes, repairs, gardening, and so forth are estimated at $750 per year. For tax purposes, Al plans to depreciate the building by the sum-of-years'-digits method, assuming that the building has a 20-year remaining life and no salvage value. Of the total $300,000 cost of the property, $250,000 represents the value of the building and $50,000 is the value of the lot. Assume that Al is in the 38% incremental income tax bracket (combined state and federal taxes) throughout the 20 years.
In this analysis Al estimates that the income and expenses will remain constant at their present levels. If he buys and holds the property for 20 years, what after-tax rate of return can he expect to receive on his investment, using the following assumptions?
A. Al believes the building and the lot can be sold at the end of 20 years for the $50,000 estimated value of the lot.
B. A more optimistic estimate of the future value of the building and the lot is that the property can be sold for $380,000 at the end of 20 years.
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