Question

Mr. Renaldo purchased 30 acres of undeveloped ranch land 10 years ago for $935,000. He is considering subdividing the land into one-third-acre lots and improving the land by adding streets, sidewalks, and utilities. He plans to advertise the 90 lots for sale in a local real estate magazine. Mr. Renaldo projects that the improvements will cost $275,000 and that he can sell the lots for $20,000 each. He is also considering an offer from a local corporation to purchase the 30-acre tract in its undeveloped state for $1.35 million. Assume that Mr. Renaldo makes no other property dispositions during the year and has a 35 percent tax rate on ordinary income and a 15 percent tax rate on capital gain. Required: Compute the after-tax cash flow if Mr. Renaldo develops the land. Compute the after-tax cash flow if Mr. Renaldo sells the land.

Answer 1

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