The first thing you must evaluate is the amount of money he would realize from selling his building currently (Investment Base). Your client, Jack, owns his 20,000 square foot industrial building in which he imports foreignmade computers to resell to business and industry. He built the building 10 years ago (in 1991) for a total cost of $450,000 on land that he acquired for $50,000. He has taken straightline depreciation over a 31.5 year life and he financed the property with a $400,000 mortgage over 20 years at 9% fixed interest.
Investment Assumptions  
Price of Property  $500,000.00  
Date of Acquisition  1 January 1991  
Holding Period  10 Years  
Inflation Rate  Zero  
Sale Price Method  Sale Price = $800,000.00  
Selling Costs  10%  
Investor's Assumptions  
General Vacancy & Credit Loss  Zero  
Tax Rate  First Year  35%  
Tax Rate  Following Years  35%  
Capital Gain Rate  35%  
Cost Recovery Recapture Rate  35%  Losses Taken Currently  
Present Value Discount Rate Before Debt  12% per Year  
Present Value Discount Rate Before Tax  12% per Year  
Present Value Discount Rate After Tax  12% per Year  
Depreciation Assumptions  
Depreciable Amount  $450,000.00  
Depreciable Life  31.5 Years  
Depreciation Method  Straight Line  
Depreciation Start Date  at Acquisition  
Loan Assumptions  
Loan Amount  $400,000.00  
Loan Interest Rate  9% Annually  
Original Loan Period  20 Years  
Loan Origination Date  at Acquisition  
Loan Type  Monthly Payments, Amortizing  
This report shows that Jack would net $309,314 (Investment Base) from the sale of the building after paying transaction costs, repaying the loan balance, and paying Capital Gain Tax.
Analysis of Sale Proceeds  
Sale Price (as discussed above)  $800,000  
 Costs of Sale (10%)  80,000  
 Loan Balances  284,102  
 Prepayment Penalties  0  
Sale Proceeds Before Tax  $435,898  
Analysis of Capital Gain Results  
Sale Price  $800,000  
 Capitalized Costs of Sale (100%)  80,000  
Net Sale Price for Tax Purposes  $720,000  
Property Basis at Acquisition  $500,000  
+ Capitalized Closing Costs (100%)  0  
+ Capital Additions  0  
 Depreciation Taken  141,667  
+ Excess Depreciation Recaptured  0  
Adjusted Basis at Sale  358,333  
Capital Gain (or Loss)  $361,667  
 Suspended Passive Losses  0  
Net Capital Gain (or Loss)  $361,667  
 Cost Recovery Recaptured  141,667  
Adjusted Net Capital Gain (or Loss)  $220,000  
Cost Recovery Recapture Tax (@ 35%)  (49,583)  
Tax on Adjusted Net Capital Gain (@ 35%)  (77,000)  
Expenses Recognized at Sale  
Expensed Costs of Sale  0  
+ Accrued Loan Interest  0  
+ Unamortized Points  0  
+ Prepayment Penalties  0  
 Excess Depreciation Recaptured  0  
Total Expenses Recognized at Sale  0  
Tax Savings Due to Sale Expenses (@ 35%)  0  
Net Taxable Income  $361,667  
After Tax Cash Proceeds of Sale  $309,314 
Now, you set up the assumptions associated with Jack continuing to hold the building and foregoing the investment (Stay and not Sell).
Investment Assumptions  
Price of Property  $593,416.00  
Date of Acquisition  1 January 2001  
Holding Period  10 Years  
Inflation Rate  Zero  
Sale Price Method  Sale Price = $1,058,000.00  
Selling Costs  10%  
Investor's Assumptions  
General Vacancy & Credit Loss  Zero  
Tax Rate  First Year  35%  
Tax Rate  Following Years  35%  
Capital Gain Rate  35%  
Cost Recovery Recapture Rate  35%  Losses Taken Currently  
Present Value Discount Rate Before Debt  12% per Year  
Present Value Discount Rate Before Tax  12% per Year  
Present Value Discount Rate After Tax  12% per Year  
Building Depreciation Assumptions  
Depreciable Amount  $450,000.00  
Depreciable Life  31.5 Years  
Depreciation Method  Straight Line w/o First Half Period Rule  
Recapture Method  Excess Over Straight Line  
Depreciation Start Date  at Acquisition  
Set Substitute Basis Assumptions  


Substitute Basis  $357,738.00  
Prior Cost Recovery Taken  $142,262.00  
Loan Assumptions  
Loan Amount  $400,000.00  
Loan Interest Rate  9% Annually  
Original Loan Period  20 Years  
Loan Origination Date  1 January 1991  
Loan Type  Monthly Payments, Amortizing  
Lease Payment Revenue Assumptions  
Annual Revenue  $80,000.00  
Revenue Start Date  at Acquisition  
Revenue Period  5 Years  
Revenue Growth Method  No Growth is Projected  
Lease Payment Second 5 Years Revenue Assumptions  
Annual Revenue  $92,000.00  
Revenue Start Date  Continuation  
Revenue Period  5 Years  
Revenue Growth Method  No Growth is Projected  
Now, you set up the assumptions associated with Jack continuing to hold the building and foregoing the investment (Stay and not Sell).
Investment Assumptions  
Price of Property  $593,416.00  
Date of Acquisition  1 January 2001  
Holding Period  10 Years  
Inflation Rate  Zero  
Sale Price Method  Sale Price = $1,058,000.00  
Selling Costs  10%  
Investor's Assumptions  
General Vacancy & Credit Loss  Zero  
Tax Rate  First Year  35%  
Tax Rate  Following Years  35%  
Capital Gain Rate  35%  
Cost Recovery Recapture Rate  35%  Losses Taken Currently  
Present Value Discount Rate Before Debt  12% per Year  
Present Value Discount Rate Before Tax  12% per Year  
Present Value Discount Rate After Tax  12% per Year  
Building Depreciation Assumptions  
Depreciable Amount  $450,000.00  
Depreciable Life  31.5 Years  
Depreciation Method  Straight Line w/o First Half Period Rule  
Recapture Method  Excess Over Straight Line  
Depreciation Start Date  at Acquisition  
Set Substitute Basis Assumptions  


Substitute Basis  $357,738.00  
Prior Cost Recovery Taken  $142,262.00  
Loan Assumptions  
Loan Amount  $400,000.00  
Loan Interest Rate  9% Annually  
Original Loan Period  20 Years  
Loan Origination Date  1 January 1991  
Loan Type  Monthly Payments, Amortizing  
Buy  2001  2002  2003  2004  2005  2006  2007  2008  2009  2010  Sell  Total  
Before Tax Cash Flow Projection  
Investment and Sale  (593,416)  0  0  0  0  0  0  0  0  0  0  952,200  358,784 
Effective Income  0  0  0  0  0  0  0  0  0  0  0  0  0 
Operating Expense  0  0  0  0  0  0  0  0  0  0  0  0  0 
Cash Flow Before Debt  (593,416)  0  0  0  0  0  0  0  0  0  0  952,200  358,784 
Debt Service  284,102  (43,187)  (43,187)  (43,187)  (43,187)  (43,187)  (43,187)  (43,187)  (43,187)  (43,187)  (43,183)  0  (147,763) 
Cash Flow Before Tax  (309,314)  (43,187)  (43,187)  (43,187)  (43,187)  (43,187)  (43,187)  (43,187)  (43,187)  (43,187)  (43,183)  952,200  211,021 
Taxable Income Projection  
Taxable Revenue  0  0  0  0  0  0  0  0  0  0  0  0  0 
Taxable Expense  0  0  0  0  0  0  0  0  0  0  0  0  0 
Interest Expense  0  (24,824)  (23,101)  (21,217)  (19,156)  (16,902)  (14,436)  (11,739)  (8,789)  (5,563)  (2,033)  0  (147,763) 
Depreciation  0  (14,286)  (14,286)  (14,286)  (14,286)  (14,286)  (14,286)  (14,286)  (14,286)  (14,286)  (13,690)  0  (142,262) 
Ordinary Income  0  (39,110)  (37,387)  (35,503)  (33,442)  (31,188)  (28,722)  (26,025)  (23,075)  (19,848)  (15,724)  0  (290,025) 
After Tax Cash Flow Projection  
Cash Flow Before Tax  (309,314)  (43,187)  (43,187)  (43,187)  (43,187)  (43,187)  (43,187)  (43,187)  (43,187)  (43,187)  (43,183)  952,200  211,021 
Ordinary Income  0  (39,110)  (37,387)  (35,503)  (33,442)  (31,188)  (28,722)  (26,025)  (23,075)  (19,848)  (15,724)  0  (290,025) 
Capital Gains  0  0  0  0  0  0  0  0  0  0  0  736,724  736,724 
Taxable Income  0  (39,110)  (37,387)  (35,503)  (33,442)  (31,188)  (28,722)  (26,025)  (23,075)  (19,848)  (15,724)  736,724  446,699 
Taxes  0  13,688  13,086  12,426  11,705  10,916  10,053  9,109  8,076  6,947  5,503  (257,853)  (156,345) 
Cash Flow After Tax  (309,314)  (29,499)  (30,101)  (30,761)  (31,482)  (32,271)  (33,134)  (34,078)  (35,111)  (36,240)  (37,679)  694,347  54,677 
Rate of Return Before Debt (IRR)  4.9% 
Rate of Return Before Tax (IRR)  3.5% 
Rate of Return After Tax (IRR)  1.1% 
Net Present Value Before Debt @12%  (286,833) 
Net Present Value Before Tax @12%  (261,109) 
Net Present Value After Tax @12%  (278,559) 
Investment Assumptions  
Price of Property  None  
Date of Acquisition  1 January 2001  
Holding Period  10 Years  
Inflation Rate  Zero  
Sale Price Method  No Sale Price Specified  
Investor's Assumptions  
General Vacancy & Credit Loss  Zero  
Tax Rate  First Year  35%  
Tax Rate  Following Years  35%  
Capital Gain Rate  35%  
Cost Recovery Recapture Rate  35%  Losses Taken Currently  
Present Value Discount Rate Before Debt  12% per Year  
Present Value Discount Rate Before Tax  12% per Year  
Present Value Discount Rate After Tax  12% per Year  
Lease Payment Revenue Assumptions  
Annual Revenue  ($80,000.00)  
Revenue Start Date  at Acquisition  
Revenue Period  5 Years  
Revenue Growth Method  No Growth is Projected  
Lease Payment Second 5 Years Revenue Assumptions  
Annual Revenue  ($92,000.00)  
Revenue Start Date  Continuation  
Revenue Period  5 Years  
Revenue Growth Method  No Growth is Projected  
Buy  2001  2002  2003  2004  2005  2006  2007  2008  2009  2010  Sell  Total  
Before Tax Cash Flow Projection  
Investment and Sale  0  0  0  0  0  0  0  0  0  0  0  0  0 
Effective Income  0  (80,000)  (80,000)  (80,000)  (80,000)  (80,000)  (92,000)  (92,000)  (92,000)  (92,000)  (92,000)  0  (860,000) 
Operating Expense  0  0  0  0  0  0  0  0  0  0  0  0  0 
Cash Flow Before Debt  0  (80,000)  (80,000)  (80,000)  (80,000)  (80,000)  (92,000)  (92,000)  (92,000)  (92,000)  (92,000)  0  (860,000) 
Debt Service  0  0  0  0  0  0  0  0  0  0  0  0  0 
Cash Flow Before Tax  0  (80,000)  (80,000)  (80,000)  (80,000)  (80,000)  (92,000)  (92,000)  (92,000)  (92,000)  (92,000)  0  (860,000) 
Taxable Income Projection  
Taxable Revenue  0  (80,000)  (80,000)  (80,000)  (80,000)  (80,000)  (92,000)  (92,000)  (92,000)  (92,000)  (92,000)  0  (860,000) 
Taxable Expense  0  0  0  0  0  0  0  0  0  0  0  0  0 
Interest Expense  0  0  0  0  0  0  0  0  0  0  0  0  0 
Depreciation  0  0  0  0  0  0  0  0  0  0  0  0  0 
Ordinary Income  0  (80,000)  (80,000)  (80,000)  (80,000)  (80,000)  (92,000)  (92,000)  (92,000)  (92,000)  (92,000)  0  (860,000) 
After Tax Cash Flow Projection  
Cash Flow Before Tax  0  (80,000)  (80,000)  (80,000)  (80,000)  (80,000)  (92,000)  (92,000)  (92,000)  (92,000)  (92,000)  0  (860,000) 
Ordinary Income  0  (80,000)  (80,000)  (80,000)  (80,000)  (80,000)  (92,000)  (92,000)  (92,000)  (92,000)  (92,000)  0  (860,000) 
Capital Gains  0  0  0  0  0  0  0  0  0  0  0  0  0 
Taxable Income  0  (80,000)  (80,000)  (80,000)  (80,000)  (80,000)  (92,000)  (92,000)  (92,000)  (92,000)  (92,000)  0  (860,000) 
Taxes  0  28,000  28,000  28,000  28,000  28,000  32,200  32,200  32,200  32,200  32,200  0  301,000 
Cash Flow After Tax  0  (52,000)  (52,000)  (52,000)  (52,000)  (52,000)  (59,800)  (59,800)  (59,800)  (59,800)  (59,800)  0  (559,000) 
Rate of Return Before Debt (IRR)  0.0% 
Rate of Return Before Tax (IRR)  0.0% 
Rate of Return After Tax (IRR)  0.0% 
Net Present Value Before Debt @12%  (504,615) 
Net Present Value Before Tax @12%  (504,615) 
Net Present Value After Tax @12%  (328,000) 
Present Value Discount Rate After Tax
versus
Net Present Value After Tax @12%
Assumption Value 
LeaseBack NPV 
Cont. Own NPV 
Zero  (559,000)  54,677 
2% per Year  (505,381)  (38,082) 
4% per Year  (459,254)  (111,123) 
6% per Year  (419,376)  (168,733) 
8% per Year  (384,734)  (214,224) 
10% per Year  (354,502)  (250,165) 
12% per Year  (328,000)  (278,559) 
14% per Year  (304,669)  (300,971) 
16% per Year  (284,043)  (318,631) 
18% per Year  (265,738)  (332,507) 
20% per Year  (249,428)  (343,365) 
Sale Price Parameter
versus
Net Present Value After Tax @12%
Assumption Value 
LeaseBack NPV 
Cont. Own NPV 
No Sale Price Computed  (328,000)  (317,737) 
No Sale Price Computed  (328,000)  (301,727) 
No Sale Price Computed  (328,000)  (285,716) 
No Sale Price Computed  (328,000)  (269,706) 
No Sale Price Computed  (328,000)  (253,696) 
No Sale Price Computed  (328,000)  (237,686) 