What after-tax rate of return will sam receive

Assignment Help Business Economics

Reference no: EM131810849

Sam Johnson inherited $85,000 from his father. Sam is considering investing the money in a house, which he will then rent to tenants. The $85,000 cost of the property consists of $17,500 for the land, and $67,500 for the house. Sam believes he can rent the house and have $8000 a year net income left after paying the property taxes and other expenses. The house will be depreciated by straight-line depreciation using a 45-year depreciable life.

(a) If the property is sold at the end of 5 years for its book value at that time, what after-tax rate of return will Sam receive? Assume that his marginal personal income tax rate is 34% for federal and state taxes.

(b) Now assume there is 7% per year inflation, compounded annually. Sam will increase the rent 7% per year to match the inflation rate, so that after considering increased taxes and other expenses, the annual net income will go up 7% per year. Assume Sam's marginal income tax rate remains at 34% for all ordinary taxable income related to the property. The value of the property is now projected to increase from its present $85,000 at a rate of 10% per year, compounded annually. If the property is sold after 5 years, compute the rate of return on the after-tax cash flow in actual dollars. Also compute the rate of return on the after-tax cash flow in Year-0 dollars.

Reference no: EM131810849

Questions Cloud

Determine what montgomery profit or loss be from selling : Determine what Montgomery's profit or loss will be from selling the 7,500 additional units to the exporter

Federal income tax rate table : Assuming the federal income tax rate table is unchanged, what must their taxable income be 20 years from now?

Express that future tuition in today dollars : If the general inflation rate for the economy is 3% per year, express that future tuition in today's dollars.

Calculate the additional money : Calculate the additional money you could spend on your vacation, after taxes, by putting your vacation money ($2500) into a taxable investment

What after-tax rate of return will sam receive : If the property is sold at the end of 5 years for its book value at that time, what after-tax rate of return will Sam receive?

Find the amplifier gain that gives a velocity constant : Find the amplifier gain that gives a velocity constant equal to ?/3 where ? is the natural frequency of the system.

Discuss average-cost-will show the highest net income : In an inflationary period, which inventory method-FIFO, LIFO, average-cost-will show the highest net income

Combined federal and state income tax rate : This profitable corporation has a 40% combined federal and state income tax rate. If it requires a real 12% after-tax rate of return on its investment

What misconceptions does brian porter seem to have : What misconceptions does Brian Porter seem to have about the auditor's role with respect to Midway Corporation

User Account

All Pages