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**CFA Practice Question**

An commercial building is to be purchased for $5,000,000. Of this, $3,000,000 is financed by a mortgage, and $2,000,000 is by equity. The interest rate on the mortgage is 6.5% and it is to be repaid in 30 years by equal annual payments.

The tax rate is 40%, and interest payments on the mortgage are tax deductible.

NOI for the 1st year is $400,000 and straight line depreciation over 30 years is used.

What is the Tax for the first year?

A. 93,333

B. 15,333.

C. 38,333

**Explanation:**Tax = Tax Rate * (NOI - Depre - Interest) = 0.4 * (400,000 - 5,000,000/30 - 3,000,000 * 0.065) = 15,333.

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**User Contributed Comments**
1

User |
Comment |
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chantal |
Whether Assets are financed by debt or equity, the total cost of the asset is recorded (ie 5000000$) and depreciated over the life of the asset ie over 30 years. Based on a straight line, this gives a 166 667$ depreciation exp plus a 195 000$ interest expense for a taxable income of 40,000$. |