Question

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.)

Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using tables.

  

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.)

      

Answer 1

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 Next > < Previous Related Solutions 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 $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 Subjects Accounting Advanced Math Anatomy and Physiology Biology Chemistry Civil Engineering Computer Science Economics Electrical Engineering Finance History Math Mechanical Engineering Operations Management Physics Psychology Statistics and Probability Nursing Other ADVERTISEMENT Latest Questions Non-constant growth model: Do=$2.00 required return on equity= 5% g= 9% n=1,2 g=7% n=3,4 g=3% n=5... . Find all x ∈ Z143 such that x2Ξ 7 (mod 143). Please explain all steps... #Python: A palindrome is a sequence of characters that reads the same backwards as forwards. For... Explain an example in which a variable has two different addresses at different places in a... Hadley, a thirty-five-year-old physician, has worked at Princeton Plainsboro Hospital for six years. She recently received... QUESTION 1. For each of the following, state whether the occurrence of the variable x occurs... According to Mike Taft of RVK, the “Markets Group” is an important unit of the Federal... ADVERTISEMENT About @ 2020 WizEdu