Answer to Question #163502 in Economics for Hasan

Question

 Ahmed (Tax filler) has find a house at ABC city for sale for $170,000. It is estimated that $90,000 is the value of the land and $80,000 is the value of the house. He is purchasing the house on January 1 to rent and plans to own the house for 10 years. After 10 years, it is expected that the house and land can be sold on December 31 for $580,000. Total annual expenses (maintenance, property taxes, insurance, etc.) are expected to be $5,500 per year. The rental income is expected to be $6,000 per year with annual increment of 7%. The house would be depreciated by Income Tax Ordinance, 2001 (FBR). Capital gain and income tax rate is AOP/Individual as per tax 2021 (2020-2021), Use 1 USD = XX.X (CLO-3, 8)

a) Construct the after-tax cash flow for the 10-year project life.

b) Determine the after-tax rate of return on this investment.

c) If Ahmed could sell the house after 3 years at 250,000 would his rate of return

be better than if he kept for 10 years? It is suggested to find actual ROR and make comparison.

Answer 1

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