## Before Tax Cash Flow Projection

Effective Income represents the lease savings the owner does not pay by purchasing the building.

Cash Flow Before Tax represents the down payment, actual savings after debt , and the proceeds from sale the owner receives by purchasing the building.

This creates a "T-bar", and allows an IRR calculation on the down payment. In this case the owner will receive savings worth 19.7% IRR Before Tax on a \$232,000 down payment.

If the owner cannot make 19.7% IRR Before Tax in another investment, then purchasing the property will give the greatest return on investment. Hence all things being equal, the purchase of the property would be the logical choice.

If the owner can make more than 19.7% IRR Before Tax in another investment, then purchasing the property would not give the greatest return on investment. Hence all things being equal, leasing the property would be the logical choice.

If the owner makes 19.7% IRR Before Tax in another investment, then 19.7% IRR Before Tax is the point of indifference, when buying or lease yields the same investment opportunities. Hence all things being equal, the leasing or purchase of the property would both be equally logical.

 Time Investmentand Sale EffectiveIncome OperatingExpense Cash FlowBefore Debt DebtService Cash FlowBefore Tax Buy (1,020,000) 0 0 (1,020,000) 788,000 (232,000) 2001 0 93,000 0 93,000 (87,815) 5,185 2002 0 97,650 0 97,650 (87,815) 9,835 2003 0 102,533 0 102,533 (87,815) 14,717 2004 0 107,659 0 107,659 (87,815) 19,844 2005 0 113,042 0 113,042 (87,815) 25,227 2006 0 118,694 0 118,694 (87,815) 30,879 2007 0 124,629 0 124,629 (87,815) 36,814 2008 0 130,860 0 130,860 (87,815) 43,045 2009 0 137,403 0 137,403 (87,815) 49,588 2010 0 144,274 0 144,274 (87,815) 56,458 Sell 1,531,161 0 0 1,531,161 (732,978) 798,184 Total 511,161 1,169,744 0 1,680,905 (823,128) 857,777

 Rate of Return Before Debt (IRR) 14.3% Rate of Return Before Tax (IRR) 19.7% Net Present Value Before Debt @12% 141,615 Net Present Value Before Tax @12% 168,514

## Taxable Income Projection

 Time TaxableRevenue TaxableExpense InterestExpense Depre-ciation OrdinaryIncome Buy 0 0 0 0 0 2001 93,000 0 (84,211) (18,429) (9,640) 2002 97,650 0 (83,770) (19,231) (5,350) 2003 102,533 0 (83,280) (19,231) 22 2004 107,659 0 (82,736) (19,231) 5,692 2005 113,042 0 (82,132) (19,231) 11,679 2006 118,694 0 (81,462) (19,231) 18,002 2007 124,629 0 (80,717) (19,231) 24,681 2008 130,860 0 (79,891) (19,231) 31,738 2009 137,403 0 (78,974) (19,231) 39,199 2010 144,274 0 (77,955) (18,429) 47,889 Sell 0 0 (8,000) 0 (8,000) Total 1,169,744 0 (823,128) (190,705) 155,911

## After Tax Cash Flow Projection

The after tax point of indifference is 15.9% IRR After Tax.

If you make 10% IRR after tax on other investments, all things being equal what would be the logical choice here? Leasing or Purchasing?

Answer: Purchasing, because the other investment returns 10% after tax on the \$232,000 investment, and the purchase returns 15.9% in after tax savings.

 Time Cash FlowBefore Tax OrdinaryIncome CapitalGains TaxableIncome Taxes Cash FlowAfter Tax Buy (232,000) 0 0 0 0 (232,000) 2001 5,185 (9,640) 0 (9,640) 3,278 8,463 2002 9,835 (5,350) 0 (5,350) 1,819 11,654 2003 14,717 22 0 22 (7) 14,710 2004 19,844 5,692 0 5,692 (1,935) 17,909 2005 25,227 11,679 0 11,679 (3,971) 21,256 2006 30,879 18,002 0 18,002 (6,121) 24,759 2007 36,814 24,681 0 24,681 (8,391) 28,422 2008 43,045 31,738 0 31,738 (10,791) 32,254 2009 49,588 39,199 0 39,199 (13,328) 36,261 2010 56,458 47,889 0 47,889 (16,282) 40,176 Sell 798,184 (8,000) 701,866 693,866 (235,915) 562,269 Total 857,777 155,911 701,866 857,777 (291,644) 566,133

 Rate of Return Before Tax (IRR) 19.7% Rate of Return After Tax (IRR) 15.9% Net Present Value Before Tax @12% 168,514 Net Present Value After Tax @12% 70,950