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Determine your corporation DCFROR on its equity in the investment ?Answer

  1. Determine your corporation DCFROR on its equity in the investment  ?Answer
  2. A corporation is considering the purchase of mountain recreation land for a cost of $60,000 and you estimate that 5 years from now it will be possible to sell the land for $150,000.
  3. Assume that your corporation is in the 40% effective ordinary tax bracket and that profit from the sale of the land in 5 years will be taxed as ordinary income.
  4. Paying cash for the land
  5. Determining tax on the profit from sale of the land
  6. An investor is evaluating the purchase of 200 acres of land for a $200,000 purchase price now with plans to sell the land for a profit one year from now. The investor plans to pay the property with $40,000 cash equity and $160,000 borrowed money at a 10% annual interest rate with the loan to be paid in full when the property is sold.
  7. What escalated dollar sale value must the land have one year after purchase to give the investor a constant dollar leveraged DCFROR of 30% on investor equity if the annual inflation rate is projected to be 10%?
  8. Assume that the capital gain from the land sale will be taxed as ordinary income with an effective ordinary income tax rate of 34%. 
  9. Discount rate is sum of the DCFROR and inflation rate
  10. Calculation of the cash outflow in one year