Bill has been accepted into a university and is looking into his housing options. He is...
Bill has been accepted into a university and is looking into his housing options. He is considering purchasing a mobile home to live in for the 4 years he will be going to school. The initial purchase price for the mobile home is $40,000. Luckily, Bill knows two friends from high school who are willing to be his roommates and pay $400 per month, each. Bill figures that his lot rent will be $270 per month and taxes, utilities and insurance will be another $300 per month as well. Bill’s roommates will not pay utilities. Also, by buying the home, Bill will save $7,200 per year in rent, adding to his net returns. After the four years, Bill hopes to sell the home for $20,000. Assume straight-line depreciation over 7 years and a marginal tax rate of 20%. Bill requires a pre-tax rate of return of 10%.
What is the after-tax terminal value?
|
$20,000 |
||
|
$19,428.57 |
||
|
$35,000 |
||
|
$19,000 |
Homework Answers
Annual Depreciation=Cost of Asset/Useful Life=40000/7=$5714.29
Accumulated Depreciation at the end of four years=4*5714.29=$22,857.14
Book value at the end of four years=40000-22857.14=$17,142.86
Sales Price at the end of four years =$20,000
Gain on sale of mobile home at end of year4=20000-17142.86=$2,857.14
Tax Rate=20%
Tax on gain on sale=20%*2857.14=$571.43
After tax terminal value =20000-571.43=$19,428.57
ANSWER:
$19,428.57
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