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Appendix
Real Estate
Wrap-Around Mortgage
• n
1
= number of years remaining in original mortgage.
• PMT
1
= yearly payment of original mortgage.
• PV
1
= remaining balance of original mortgage.
• n
2
= number of years in wrap-around mortgage.
• PMT
2
= yearly payment of wrap-around mortgage.
• r = interest rate of wrap-around mortgage as a decimal.
• FV = balloon payment.
•
After-Tax Cash Flows
• ATCF
k
= After-Tax Cash Flow for kth year.
• Int
k
= interest for kth year.
• Dep
k
= depreciation for kth year.
• r = appropriate tax rate.
• NOI = Net Operating Income.
• ATCF
k
= NOI (1 - r) - 12 x PMT + r x (Int
k
+ Dep
k
).
After-Tax Net Cash Proceeds of Resale
• CO = capital purchase.
• CPR = sales price - closing costs.
• r = marginal tax rate.
• NCPR = CPR - remaining balance of mortgage.
• ATNCPR = NCPR + r x [(.6 SL Dep. - Total Dep) + .4 x (CO - CPR)]
PV
2
PV
1
–
PMT
2
11r+()
n2–
–[]
r
-------------------------------------------------------
PMT
1
11r+()
n1–
–[]
r
-------------------------------------------------------
– FV 1 r+()
n2–
+=