A property is sold for $5,100,000 with selling costs of 3% of the sales price. The mortgage balance at the time of sale is $3,600,000. The property was purchased 5 years ago for $4,820,000. Annual depreciation allowances of $153,016 have been taken. If the tax rate is 28%, what is the after-tax cash flow from sale of the property?

Other Answers to this question are incorrect on this website. Question copied from online book.

Here is the answer choices:

(A) $1,184,062

(B) $969,840

(C) $1,347,000

(D) $1,097,218

Option (d) is correct.

Explanation:

Net sales:

= Selling price - Selling cost

= $5,100,000 - (0.03 * $5,100,000)

= $5,100,000 - $153,000

= $4,947,000

Gain on sale:

= Net sales - (Cost - Depreciation)

= $4,947,000 - [$4,820,000 - (5 * $153,016) ]

= $4,947,000 - ($4,820,000 - $765,080)

= $4,947,000 - $4,054,920

= $892,080

Tax on capital gain:

= Tax rate * Gain on sale

= 0.28 * $892,080

= $249,782.40

After-tax cash flow from sale of the property:

= Net sales - Tax on capital gain - Mortgage balance

= $4,947,000 - $249,782.40 - $3,600,000

= $1,097,218