Question
In: Accounting
Ben Ryatt, professor of languages at a southern university, owns a small office building adjacent to...
|
Ben Ryatt, professor of languages at a southern university, owns a small office building adjacent to the university campus. He acquired the property 12 years ago at a total cost of $670,000—$62,000 for the land and $608,000 for the building. He has just received an offer from a realty company that wants to purchase the property; however, the property has been a good source of income over the years, so Professor Ryatt is unsure whether he should keep it or sell it. His alternatives are: |
|
Keep the property. Professor Ryatt’s accountant has kept careful records of the income realized from the property over the past 10 years. These records indicate the following annual revenues and expenses: |
| Rental receipts | $ | 163,000 | |
| Less building expenses: | |||
| Utilities | $ 29,200 | ||
| Depreciation of building | 18,700 | ||
| Property taxes and insurance | 20,300 | ||
| Repairs and maintenance | 11,200 | ||
| Custodial help and supplies | 44,200 | 123,600 | |
| Net operating income | $ | 39,400 | |
|
Professor Ryatt makes a $13,200 mortgage payment each year on the property. The mortgage will be paid off in 10 more years. He has been depreciating the building by the straight-line method, assuming a salvage value of $9,700 for the building, which he still thinks is an appropriate figure. He feels sure that the building can be rented for another 16 years. He also feels sure that 16 years from now the land will be worth 2.10 times what he paid for it. |
|
Sell the property. A realty company has offered to purchase the property by paying $200,000 immediately and $21,000 per year for the next 16 years. Control of the property would go to the realty company immediately. To sell the property, Professor Ryatt would need to pay the mortgage off, which could be done by making a lump-sum payment of $82,000. Professor Ryatt requires a 12% rate of return. (Ignore income taxes.) |
|
|
| Required: |
| a. |
Calculate the net present value of cash flows using total cost approach if he keeps the property. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places and intermediate calculations to nearest dollar amount.) |
| b. |
Calculate the net present value of cash flows using total cost approach if he sells the property. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places and intermediate calculations to nearest dollar amount.) |
Solutions
Expert Solution
| Calculation of NPV, if he keeps the property | ||||||
| Period | Cash Inflow | Mortage | Salvage | Net Cash flows | P.V.F @ 12% | N.P.V @ 12% |
| 1 | 58100 | -13200 | 44900 | 0.893 | 40096 | |
| 2 | 58100 | -13200 | 44900 | 0.797 | 35785 | |
| 3 | 58100 | -13200 | 44900 | 0.712 | 31969 | |
| 4 | 58100 | -13200 | 44900 | 0.636 | 28556 | |
| 5 | 58100 | -13200 | 44900 | 0.567 | 25458 | |
| 6 | 58100 | -13200 | 44900 | 0.507 | 22764 | |
| 7 | 58100 | -13200 | 44900 | 0.452 | 20295 | |
| 8 | 58100 | -13200 | 44900 | 0.404 | 18140 | |
| 9 | 58100 | -13200 | 44900 | 0.361 | 16209 | |
| 10 | 58100 | -13200 | 44900 | 0.322 | 14458 | |
| 11 | 58100 | 58100 | 0.288 | 16733 | ||
| 12 | 58100 | 58100 | 0.257 | 14932 | ||
| 13 | 58100 | 58100 | 0.229 | 13305 | ||
| 14 | 58100 | 58100 | 0.205 | 11911 | ||
| 15 | 58100 | 58100 | 0.183 | 10632 | ||
| 16 | 58100 | 58100 | 0.163 | 9470 | ||
| 16 | 9700 | 9700 | 0.163 | 1581 | ||
| 16 | 130200 | 130200 | 0.163 | 21223 | ||
| NPV | 353516 | |||||
| Salvage Value of Land (2.1 times of original cost) | 1,30,200 | |||||
| Calculation of NPV, if he sells the property | ||||||
| Period | Cash Inflow | Mortage pay off | Net Cash flows | P.V.F @ 12% | N.P.V @ 12% | |
| 0 | 200000 | -82000 | 118000 | 1 | 118000 | |
| 1 | 21000 | 21000 | 0.893 | 18753 | ||
| 2 | 21000 | 21000 | 0.797 | 16737 | ||
| 3 | 21000 | 21000 | 0.712 | 14952 | ||
| 4 | 21000 | 21000 | 0.636 | 13356 | ||
| 5 | 21000 | 21000 | 0.567 | 11907 | ||
| 6 | 21000 | 21000 | 0.507 | 10647 | ||
| 7 | 21000 | 21000 | 0.452 | 9492 | ||
| 8 | 21000 | 21000 | 0.404 | 8484 | ||
| 9 | 21000 | 21000 | 0.361 | 7581 | ||
| 10 | 21000 | 21000 | 0.322 | 6762 | ||
| 11 | 21000 | 21000 | 0.288 | 6048 | ||
| 12 | 21000 | 21000 | 0.257 | 5397 | ||
| 13 | 21000 | 21000 | 0.229 | 4809 | ||
| 14 | 21000 | 21000 | 0.205 | 4305 | ||
| 15 | 21000 | 21000 | 0.183 | 3843 | ||
| 16 | 21000 | 21000 | 0.163 | 3423 | ||
| NPV | 264496 | |||||
| Working Note: Calculation of Cash inflow in case of rentals: | ||||||
 ekkarill92 answered 2 years agoRelated SolutionsRaul Martinas, a professor of languages at Eastern University, owns a small office building adjacent to...Raul Martinas, a professor of languages at Eastern University,
owns a small office building adjacent to the university campus. He
acquired the property 10 years ago at a total cost of $669,500—that
is, $90,500 for the land and $579,000 for the building. He has just
received an offer from a realty company that wants to purchase the
property; however, the property has been a good source of income
over the years, and so Martinas is unsure whether he should keep...
Raul Martinas, a professor of languages at Eastern University, owns a small office building adjacent to...
Raul Martinas, a professor of languages at Eastern University,
owns a small office building adjacent to the university campus. He
acquired the property 10 years ago at a total cost of $530,000—that
is, $50,000 for the land and $480,000 for the building. He has just
received an offer from a realty company that wants to purchase the
property; however, the property has been a good source of income
over the years, and so Martinas is unsure whether he should keep...
Dr. Joe Schmo is a finance professor at a small Southern liberal arts university. A student...Dr. Joe Schmo is a finance professor at a small Southern liberal
arts university. A student who has performed poorly in the
introductory finance class has offered to pay Dr. Schmo for a
better grade. Dr. Schmo presented the student with this agreement
to sell a better grade: Since he would be fired from his position,
he would lose his salary and benefits. His salary is $74,000 per
year, paid in equal payments at the end of the each month....
Arapeta Williams owns Southern Supplies Ltd, a small building supplies business. He asks you to assist...Arapeta Williams owns Southern Supplies Ltd, a small building
supplies business. He asks you to assist in preparing his final
accounts from the following trial balance for the period ended 31
March 2020.
Debit
Credit
Cash
$7,000
Accounts Payable
$29,000
Accounts Receivable
$17,000
Advertising
$3,600
Capital (Opening)
$70,000
Capital Contributed
$28,500
Delivery Van
$20,000
Drawings
$24,000
Electricity
$3,100
Freight Inwards
$4,600
Fuel (Van) Expense
$2,500
General Expenses
$2,450
Interest Expense
$2,280
Interest Received
$130
Inventory (Opening)
$2,600
Loan from Southern...
A real estate investor owns a small office building she has leased to a major insurance...A real estate investor owns a small office building she has
leased to a major insurance company for a rental fee based on a
share of the profits. If the insurance company is successful, the
present value of future rentals is estimated at $15 million. If the
insurance company is not successful, the present value of the
rentals will be $2 million. The insurance company has offered the
investor $6 million to buy the property outright. On an expected
monetary...
Financing Building Costs of Saint Louis University: Saint Louis University is building a $13,000,000 office and...Financing Building Costs of Saint Louis
University:
Saint Louis University is building a $13,000,000 office and
classroom building in St. Louis in Missouri, and is planning to
finance the construction at an 80% loan-to-value ratio, meaning
that the borrowed money corresponds to 80% of the value of the
building. The balance of 20% will be paid in cash up front. This
loan has a ten-year maturity, calls for monthly payments, and is
contracted at an interest rate of 7%.
Using...
1: Ellis Company owns a small office building worth $300,000. Cameron is the risk manager. Ellis...1: Ellis Company owns a small office building worth $300,000.
Cameron is the risk manager. Ellis faces the risk of fire which
would completely destroy their building. The probability of a fire
is known to be 3%.
Cameron is considering the following risk management options to
address the risk of fire to their building:
a. Retention
b. Full Insurance for a premium of $10,000
c. Safety Program & Retention
d. Safety Program & Full Insurance (premium falls to
$8,000)
The...
2. Dee Pressants owns Dee’s Pharmacy located in a small medical office building. Dee estimates that...2. Dee Pressants owns Dee’s Pharmacy located in a small medical
office building. Dee estimates that 20% of her prescription
business comes from referrals from Dr. Mel Practice. For the next
25 prescription customers, what is the probability that a. 6 or
less were referred by Mel? b. Between 3 and 6 were referred by Mel?
c. At least 4 were referred by Mel? d. Exactly 5 were referred by
Mel? e. Dee makes $10 profit per prescription but has...
Scenario 1: Southern Company owns a building (Bldg. A) that is leases to others. Bldg. A's...
Scenario 1:
Southern Company owns a building (Bldg. A) that is leases to
others. Bldg. A's FV = $2,000,000 and its BV=$1,280,000 (OG cost of
$2,600,000 less accumulated depreciation of $1,320,000). Southern
exchanges this for a bldg. owned by the Eastern Co. (Bldg. B).
Eastern also gives Southern $200,000 to complete the exchange
1)Assume the exchange has commercial substance, on Southern's
book,
a)The amount recorded into new asset will be:
b)The amount of gain/loss on exchange will be:
2)Assumer the...
The admissions office of Southern State University needs a simple and easy-to-follow Web policy document to...The admissions office of Southern State University needs a
simple and easy-to-follow Web policy document to send to its
incoming freshmen. The document should tell students how to behave
while on the Web. After reading the information presented in this
chapter 4 MIS9 and other sources, create a document that includes a
10-item bulleted list highlighting the key issues of which incoming
students should be aware.
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
ADVERTISEMENT
|