# Eric Heiden has a house and lot for sale for $70,000. It is estimated that $10,000 is

## Question:

Eric Heiden has a house and lot for sale for $70,000. It is estimated that $10,000 is the value of the land and $60,000 is the value of the house. Bonnie Blair is purchasing the house on January 1 to rent and plans to own the house for 5 years. After 5 years, it is expected that the house and land can be sold on December 31 for $80,000. Total annual expenses (maintenance, property taxes, insurance, etc.) are expected to be $3000 per year. The house would be depreciated by MACRS depreciation using a 27.5-year straight line rate with midmonth convention for rental property. For depreciation, a salvage value of zero was used. Bonnie wants a 15% after-tax rate of return on her investment. You may assume that Bonnie has an incremental income tax rate of 27% in each of the 5 years. Capital gains are taxed at 20%. Determine the following:

(a) The annual depreciation.

(b) The capital gain (loss) resulting from the sale of the house.

(c) The annual rent Bonnie must charge to produce an after-tax rate of return of 15%. (Hint: Write an algebraic equation to solve for rent.)

DepreciationDepreciation is an important concept in accounting. By definition, depreciation is the wear and tear in the value of a noncurrent asset over its useful life. In simple words, depreciation is the cost of operating a noncurrent asset producing... Salvage Value

Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...

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