You have a contractor make improvements to a business rental for a fixxed price of $64,000. With this improvement you can obtain additional rent payments of $1,200 per month. You estimate the improvements will cause extra monthly expenses of $50 for property taxes, $45 for insurance, and $100 and $200 per month, respectively, in utility and maintenance costs. The life of this project is 15 years at which point the salvage value to the improvement is exactly $16,000. The improvements are depreciated on straight depreciation schedule (15 years). There is no income tax in Wyoming, so the only tax is Federal. Assume a marginal Federal tax rate of 33%.
Assume that you borrow $50,000 (of the needed $64,000) for the project at a nominal interest rate of 9%. The interest on this loan is tax deductible. Use an MARR of 15% and calculate a net present value for this cash stream after taxes.