Question

In: Economics

The monthly income from a piece of commercial property is​ $1,500 ​(paid as a lump sum...

The monthly income from a piece of commercial property is​ $1,500 ​(paid as a lump sum at the end of the​ year). Annual expenses are​ $2000 for upkeep of the property and ​$800 for property taxes. The property is surrounded by a security fence that cost​ $4,000 to install four years ago. Assume 52 weeks in a year and​end-of-year cash flows.

a. If i=14​%per year​ (the MARR) is an acceptable interest​ rate, how much could you afford to pay now for this property if it is estimated to have a​ re-sale value of ​$130,000 ten years from​ now?

b. Choose the correct cash flow diagram for this situation. Use the viewpoint of the buyer.

c. Based on this​ situation, give examples of opportunity costs.

d. Based on this​ situation, give examples of fixed costs.

e. Based on this​ situation, give examples of sunk costs.

f. If the 1414​% interest had been a nominal interest​ rate, what would the corresponding effective annual interest rate have been with​ bi-weekly (every two​ weeks) compounding?

Solutions

Expert Solution

a)

Annual Rental income=1500*12=$18000

Annual costs=2000+800=$2800

Net revenue per year=18000-2800=$15200

Expected sale price=FV=$130000

MARR=i=14%

Number of years=n=10 years

Price of property today=PW of cash flows=15200(P/A,14%,10)+130000*(P/F,14%,10)

(P/F,14%,10)=1/(1+14%)^10=0.269744

Price of property today=PW of cash flows=15200*5.216116+130000*0.269744=$114351.68

b)c)

Opportunity cost is the value of the next highest valued alternative of that resource.

i.e. Price of property that can be invested anywhere else for better return, annual income that can be reinvested to earn interest (MARR is the opportunity cost)

d)

Fixed costs are the costs that are independent of usage or production volumes. Property tax, annual maintenance cost are examples of fixed cost in this case.

e)

A sunk cost is the cost that is already incurred and cannot be recovered. Fence cost is a example of sunk cost in this case.

f)

Number of compounding periods=52/2=26 (bi weekly)

Bimonthly interest rate=14%/26=0.5385%

Effective annual rate of interest =(1+0.5385%)^26-1=14.99%

Rahul Sunny answered 1 year ago
Next > < Previous

Related Solutions

The monthly income from a piece of commercial property is ​$1,400 ​(paid as a lump sum...
The monthly income from a piece of commercial property is ​$1,400 ​(paid as a lump sum at the end of the​ year). Annual expenses are ​$2,000 for upkeep of the property and ​$900 for property taxes. The property is surrounded by a security fence that cost​ $4,000 to install four years ago. Assume 52 weeks in a year and​ end-of-year cash flows. a. If i=15​% per year​ (the MARR) is an acceptable interest​ rate, how much could you afford to...
Coronado Industries has issued 1,500 shares of common stock and 300 shares of preferred stock for a lump sum
Coronado Industries has issued 1,500 shares of common stock and 300 shares of preferred stock for a lump sum of $55,000 cash. 1). Give the entry for the issuance assuming the par value of the common stock was $5 and the fair value $30, and the par value of the preferred stock was $40 and the fair value $50. (Each valuation is on a per share basis and there are ready markets for each stock.) 2). Give the entry for...
(Superannuation lump sum and income stream) On 14 August 2017, Tammy Gochi, aged 53, retired from...
(Superannuation lump sum and income stream) On 14 August 2017, Tammy Gochi, aged 53, retired from her job as chief executive officer of Megacorp Limited to commence service as a volunteer for Whalepeace International. She received a superannuation lump sum of $160,000 which entirely comprised an element taxed in the fund. PAYG tax of $34,500 was withheld from the lump sum. During the remainder of the 2017/18 tax year, Tammy also received a superannuation income stream benefit of $40,000 from...
At the beginning of 2003, Firm X paid $80,000 for a piece of property with 1,000...
At the beginning of 2003, Firm X paid $80,000 for a piece of property with 1,000 acres of timber. The firm estimated that a total of 30,000 trees could ultimately be removed from this site. They estimated that the land could be sold for $10,000 after completion of the project. During 2003, Firm X spent $150,000 on labor to help with the cutting and treatment of the timber (intangible development cost). It also purchased a piece of equipment for $20,000...
what happens to consumption and leisure if a lump sum tax (raises same revenue as income...
what happens to consumption and leisure if a lump sum tax (raises same revenue as income tax) is introduced instead if income tax.
Your father invested a lump sum 35 years ago at 6.75 percent interest compounded monthly. Today,...
Your father invested a lump sum 35 years ago at 6.75 percent interest compounded monthly. Today, he gave you the proceeds of that investment which totalled OMR 77,223. How much did your father originally invest?
The McDonald Group purchased a piece of property for $1.5 million. It paid a down payment...
The McDonald Group purchased a piece of property for $1.5 million. It paid a down payment of 20% in cash and financed the balance. The loan terms require monthly payments for 15 years at an annual percentage rate of 5% compounded monthly. 1. What is the amount of each mortgage payment? 2. What is the loan balance at the end of year 5? 3. What is the amount of interest that needs to be repaid during year 5?
The McDonald Group purchased a piece of property for $1.5 million. It paid a down payment...
The McDonald Group purchased a piece of property for $1.5 million. It paid a down payment of 20% in cash and financed the balance. The loan terms require monthly payments for 15 years at an annual percentage rate of 5% compounded monthly. -What is the amount of each mortgage payment? -What is the loan balance at the end of year 5? -What is the amount of principal that needs to repaid during year 5? -What is the amount of interest...
Life insurance provides a generally income tax-free lump sum of money for your survivors in the...
Life insurance provides a generally income tax-free lump sum of money for your survivors in the event of your death. The appropriate amount of insurance depends only depends on your age. True or False?
A small commercial property has a net income of $60,300 and an annual gross income of...
A small commercial property has a net income of $60,300 and an annual gross income of $95,500. The property recently sold for $620,750. What is the gross income multiplier for this property? A. 1.58 B. 6.50 C. 8.75 D. 10.26
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT