1. Projected ownership of 4 years.
2. Rental revenues before taxes of $600,000 at EOY1 decreasing thereafter at an annual rate of 1.0%.
3. Annual expenses of $400,000 at EOY1 increasing thereafter at an annual rate of 1.0%.
4. Today’s asking price for the building is $800,000 with an expected selling price of $900,000 in 4 years.
5. The Canadian income tax rate on this type of investment is assumed to be 50% (on profits before taxes, capital gains or losses, terminal losses and on recaptured depreciation).
6. Buildings and equipment are to be depreciated using the DB method with a 10% depreciation rate.
7. The half-year rule applies to the depreciation of the building.
8. Working capital = $0.
9. You will need a $500,000 loan at a 10% rate which will be repaid as follows: • EOY1 = 0% of the total loan • EOY2 = 25% • EOY3 = 35% • EOY4 = 40%
10. The annual inflation rate is 2.0%.
11. MARRs are:
• Before-taxes with inflation = 10%
• Before-taxes without inflation (inflation-free) = 8%
• After-taxes with inflation = 5%
• After-taxes without inflation (inflation free) = 3%
Question:
1. If the initial cost of the rental building is $800,000 (before accounting for the impact of annual depreciation on income taxes), what would be its after-tax initial cost (nearest $100) (after accounting for tax-savings due to annual depreciation? a) 607,400; b) 677,000; c) 704,000; d) 713,000.