Question

Shirly Chase, a founding partner in the firm of Dean and Howe, has a prospering professional practice. Chase has decided to investigate real estate as an estate-building mechanism and has asked you for advice concerning the property as descirbed below. You promptly arrange a consultation, at which time you obtain a retainer and determine the following facts:

A) Chase's earnings from her professional practice are sufficient to place her firmly in the 35% marginal income tax bracket (combined federal and state). She expects this  situation to continue into the indefinite future.     

B) Long-term capital gains are expected to be taxed at a 15% marginal tax rate

C) Chase has other investments but is in no danger of incurring liability for the alternative minimum tax.

You investigate several properties that seem to fit Chase's needs and conclude that one seems particularly well suited to her investment picture. Information on the property, an apartment building, is as follows:

* Market value (and asking price) = $2,150,000

* Next year's expected gross income = $425,000

* Next year's expected operating income = $210,000

* Building value/total property value = 0.80

* Available mortgage = $1,600,000

* Mortgage terms: 9% interest, 25-year, fully amortizing note with monthly payments and a 7-year call provision. There is no penalty for prepayment and no loan origination fee

* Operating forecast: Operating income and operating expenses alike are expected to increase at a compound annual rate of 3% for an indefinite period

* Holding period: If Chase acquires the property, she will most likely sell after 6 years and pay off balance of the mortgage note out of the sales proceeds

* The gross income multiplier, which is expected to remain constant over the transaction costs associated with disposal after 6 years (at the end of her 6th year of ownership), are expected to be about 6% of the sales price

INSTRUCTIONS: Develop a comprehensive 6-year after-tax cash-flow forecast for this property, including estimated after-tax cash from disposal.

Answer 1

Please find schdule and total inflow at the end of 6th year

Cash Inflow	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Operating Income	210,000	216,300	222,789	229,473	236,357	243,448
Less:
Interest on Mortgage	143,276	141,601	139,770	137,766	135,575	133,178
	66,724	74,699	83,019	91,706	100,782	110,269
Less: Tax	23,354	26,145	29,057	32,097	35,274	38,594
Net Profit	43,371	48,554	53,963	59,609	65,508	71,675
Principal payment	17,850	19,525	21,356	23,359	25,551	27,948
Net Cash Inflow	25,521	29,030	32,607	36,250	39,957	43,728

Inflow from sale of property at end of 6th year.

Sale consideration	7,083,333
(425000*100)/6
Less: Purchase price	2,150,000
Capital Gain	4,933,333
Less: Capital gain tax	740,000
Net Gain	4,193,333
Less : Loan repaid	1,464,411
Cash Inflow	2,728,922

Total Inflow from this deal is

Operating cashflow for 6 years= 207,092

Cash inflow on sale of property=27,28,922

Total inflow =29,36,014