Question

​ If sold today If sold next year Sale price $2,600,000 $2,750,000 Mortgage balance 1,000,000 900,000 Capital gain tax 112,500 135,000 Cash flow $1,487,500 $1,715,000 ​ ​ ​ NOI over next year ​ $60,000 Consider the information in the table above. What is the marginal rate of return for keeping the property one additional year

Answer 1

Answer -

Marginal rate of return is the return that is anticipated to be generated for marginal increase in investment. In the current scenario the marginal increase in investment is keeping the property one additional year rather than investment is further increased in property.

Hence, the marginal return for one additional year from the property will be the additional cash flow arise in one more year of keeping the property.

Therefore,

Marginal return = (Cash flow of next year - Cash flow of today) + Net Operating Income over next year

Where -

Cash flow of next year is given as $1,715,000

Cash flow of today is given as $1,487,500

Net Operating Income over next year is given as $60,000

Hence,

Marginal return = ($1,715,000 - $1,487,500) + $60,000

Marginal return = $227,500 + $60,000

Marginal return = $287,500

Now, let us calculate the marginal rate of return for keeping the property one additional year.

Marginal rate of return = Marginal return / Cash flow of today

Where -

Marginal return is calculated above as $287,500

Cash flow of today is given as $1,487,500

Hence,

Marginal rate of return = $287,500 / $1,487,500

Marginal rate of return = 0.1933

or,

Marginal rate of return = 19.33%