Chicago Investors, Inc. is interested in preserving a certified historic structure in downtown Chicago in 2019. The building will cost $2,000,000, and the renovations to rehabilitate the building will cost $2,500,000. Assuming a 5% discount rate that has a factor of 3.546, what is the after-tax cost after claiming the Rehabilitation Credit available to Chicago Investors, Inc.? a. $4,045,400

b. $3,600,000

c. $3,931,750

d. $4,500,000

correct answer is a. $4,045,400

Explanation:

given data

building cost = $2,000,000

Rehabilitation cost = $2,500,000

discount rate = 5%

factor = 3.546

solution

we get here after-tax cost after claiming the Rehabilitation

so first we get here total cost that is = $2,000,000 + $2,500,000

total cost = $4,500,000

and here tax saving by credit will be

tax saving by credit = $2,500,000 * 20%

here 20% credit is allow for qualify expenditure that is made to rehabilitate

tax saving by credit = $500,000

and here credit spread for 5 year it mean $100,000 per year

so here Current year credit is = $100,000

and Present value of credit for the years 2-5 = $100,000 * annuity factor

= $100,000 * 3.546 = $354,600

so here Present value of credit will be = $354,600 + $100,000

Present value of credit = $454,600

and

After tax cost of credit will be as

After tax cost of credit = $4,500,000 - $454,600

After tax cost of credit = $4,045,400