Question

Assume you own rental property with annual rental revenue of $10,000. The annual loan payment of $5,000 had $4,000 going toward interest and the rest toward principal. The maintenance, insurance, and property tax expenses totaled $3,000 for the year. Depreciation expense equaled $4,000 and your tax rate is 20%. What did your after-tax cash flows equal?

Answer 1

The after-tax cash flows equal $4,000.

Step-by-step explanation:

To calculate the after-tax cash flows, we need to consider the rental revenue, loan payment, expenses, and depreciation expense. First, subtract the annual expenses of $3,000 from the annual rental revenue of $10,000, which gives us $7,000. Next, subtract the annual loan payment ($5,000) minus the interest portion ($4,000) to get the principal portion ($1,000). Then, subtract the depreciation expense of $4,000. The taxable income is the sum of the principal portion and the depreciation expense, which is $5,000. Finally, calculate the after-tax cash flows by multiplying the taxable income by (1 - tax rate), which is $5,000 * (1 - 0.20) = $4,000.