A Florida investor is considering a commercial property with a potential gross income of $250,000. Vacancy and collection losses are estimated at 5% of potential gross income. Operating expenses are projected to be $75,000. The mortgage payments (principal and interest) are $90,000 annually. What is the investor's annual cash flow before taxes (CFBT)?
- A$162,500
- B$97,500
- C$87,500
- D$72,500
Show answer & explanationAnswer & explanation
Correct answer: D. $72,500
First, calculate Effective Gross Income (EGI) by subtracting vacancy from Potential Gross Income (PGI). Then, calculate Net Operating Income (NOI) by subtracting operating expenses from EGI. Finally, calculate Cash Flow Before Taxes (CFBT) by subtracting debt service from NOI. PGI = $250,000. Vacancy = 5% of $250,000 = $12,500. EGI = $250,000 - $12,500 = $237,500. NOI = $237,500 - $75,000 = $162,500. CFBT = $162,500 - $90,000 = $72,500.
Why the other options are wrong
- A. This represents the Net Operating Income (NOI), not the Cash Flow Before Taxes (CFBT).
- B. This is incorrect; it might result from incorrect calculation of vacancy or expenses.
- C. This is incorrect; likely a miscalculation of expenses or debt service.
Cash Flow Before Taxes (CFBT) Calculation
The calculation of Cash Flow Before Taxes (CFBT) involves a sequence of steps: starting with potential gross income, subtracting vacancy and operating expenses to arrive at Net Operating Income (NOI), and then subtracting debt service.
- PGI - Vacancy = EGI.
- EGI - Operating Expenses = NOI.
- NOI - Debt Service = CFBT.
- CFBT is critical for determining an investment's distributable cash.
Memory trick: P-V-E-O-N-D-C: Please Visit Every Operating Nook, Don't Compromise.