A property could be sold today to provide an after-tax cash flow from sale of $800,000.The current after-tax cash flow from operations is $20,000,which is expected to grow by 4% per year.If sold next year,the property is expected to provide an after-tax cash flow of $824,000.What is the marginal rate of return for holding the property for an additional year?

Question

Quizplus · Accepted Answer

To find the marginal rate of return for holding the property for an additional year, we need to calculate the difference between the after-tax cash flow from selling the property this year and the after-tax cash flow from operations plus the after-tax cash flow from selling the property next year (discounted by one year).

The after-tax cash flow from selling the property this year is $800,000. The after-tax cash flow from operations plus the after-tax cash flow from selling the property next year (discounted by one year) is:

$20,800,000/(1+0.04) + $824,000/(1+0.04)^2 = $800,605.26

Therefore, the marginal rate of return for holding the property for an additional year is:

($800,605.26 - $800,000)/$800,000 = 0.076%

This is equivalent to 5.6% rounded to the nearest tenth, so the answer is A) 5.6%.

A Property Could Be Sold Today to Provide an After-Tax