Response to the following problem:
In the coming year, the Sandbergs expect a potential rental property investment costing $120 000 to have gross potential rental income of $20,000, vacancy and collection losses equalling 5% of gross income, and operating expenses of $10 000. The mortgage on the property is expected to require annual payments of $8500. The interest portion of the mortgage payments and the depreciation are given below for each of the next three years. The Sandbergs are in the 25% marginal tax bracket.
|
Year
|
Interest
|
Depreciation
|
|
1
|
$8300
|
$4500
|
|
2
|
8200
|
4500
|
|
3
|
8100
|
4500
|
The net operating income is expected to increase by 6% each year beyond the first year.
a. Calculate the net operating income (NOI) for each of the next three years.
b. Calculate the after-tax cash flow (ATCF) for each of the next three years.