What is the after-tax cash flow in years 1 through 5?

Question

Quizplus · Accepted Answer

To calculate the after-tax cash flow in years 1 through 5, we need to subtract the annual loan payment from the net operating income and then subtract the taxes on that difference.

Year 1: 
Net operating income = $27,000 
Loan payment = $6,390 
Taxable income = $20,610 
Taxes on taxable income = 0.35 x $20,610 = $7,215.50 
After-tax cash flow = $27,000 - $6,390 - $7,215.50 = $13,394.50

Year 2: 
Net operating income = $27,000 
Loan payment = $6,390 
Taxable income = $20,610 
Taxes on taxable income = 0.35 x $20,610 = $7,215.50 
After-tax cash flow = $27,000 - $6,390 - $7,215.50 = $13,394.50

Year 3: 
Net operating income = $27,000 
Loan payment = $6,390 
Taxable income = $20,610 
Taxes on taxable income = 0.35 x $20,610 = $7,215.50 
After-tax cash flow = $27,000 - $6,390 - $7,215.50 = $13,394.50

Year 4: 
Net operating income = $27,000 
Loan payment = $6,390 
Taxable income = $20,610 
Taxes on taxable income = 0.35 x $20,610 = $7,215.50 
After-tax cash flow = $27,000 - $6,390 - $7,215.50 = $13,394.50

Year 5: 
Net operating income = $27,000 
Loan payment = $6,390 
Taxable income = $20,610 
Taxes on taxable income = 0.35 x $20,610 = $7,215.50 
After-tax cash flow = $27,000 - $6,390 - $7,215.50 = $13,394.50

Adding up the after-tax cash flows for all five years: 
$13,394.50 x 5 = $66,972.50

But we also need to subtract the initial investment of $100,000: 
$66,972.50 - $100,000 = -$33,027.50

This means the investment has a negative net present value, so the best choice is to not invest.

What Is the After-Tax Cash Flow in Years 1 Through