Question

In: Finance

Your Aunt Sarah has quite a bit of money. She’s been offered a share in a...

Your Aunt Sarah has quite a bit of money. She’s been offered a share in a partnership that is being set up by a local real estate agent. The partnership will buy an existing building, called the Station Building, for $20 million. The agent is selling 25 shares, for $800,000 each. Aunt Sarah has asked you to do some financial analysis to determine whether this is a fair price for a partnership share in the Station Building.

Here’s what you discover:

  • All income from Station Building partnership will flow through to the shareholders, who will pay taxes on the income at their personal tax rates. Aunt Sarah’s tax rate is 40%.
  • Station Building will be depreciated over 40 years, giving an annual depreciation of $500,000.
  • The building is fully rented out and brings in annual rents of $7 million. You do not anticipate that these rents will increase over the next 10 years.
  • Maintenance, property taxes, and other miscellaneous expenses for Station Building cost about $1 million per year.
  • The agent who is putting together this partnership has proposed selling Station Building after ten years. He estimates that the market price of the building will not change much over this period and is likely to sell for $20 million.
  • 18% Discount Rate

Should Aunt Sarah buy a share in this partnership?

Solutions

Expert Solution

The question pertains to the cash flows from investment in a property. We use th present value calculation to determine whether Aunt Sarah should invest in the property or not.

The solution is as follows:

The NPV of the project comes out to be 20,738$. Thus, Aunt sarah should invest in the project as NPV is positive.


Related Solutions

Stock valuation Your Aunt Sarah has quite a bit of money. She’s been offered a share...
Stock valuation Your Aunt Sarah has quite a bit of money. She’s been offered a share in a partnership that is being set up by a local real estate agent. The partnership will buy an existing building, called the Station Building, for $20 million. The agent is selling 25 shares, for $800,000 each. Aunt Sarah has asked you to do some financial analysis to determine whether this is a fair parice for a partnership share in the Station Building. Here’s...
government intervention in the marketplace - that has been in the news quite a bit lately....
government intervention in the marketplace - that has been in the news quite a bit lately. Research how price ceilings in Venezuela have contributed to the extreme political and social unrest in that very disturbed country.
OG Limited is in the oil and gas business. It spends quite a bit of money...
OG Limited is in the oil and gas business. It spends quite a bit of money each year exploring for new wel When excavating one site, OG came across a significant amount of gold. OG is now mining and selling the gold. Currently, it is trying to decide how to account for the gold inventory and is considering valuing the gold at market price once it has been refined, even though it is not yet sold. How is gold Valued...
OG Limited is in the oil and gas business. It spends quite a bit of money...
OG Limited is in the oil and gas business. It spends quite a bit of money each year exploring for new wells. Currently, it has several wells that are in the production phases. The company's shares trade on the London Stock Exchange. OG is looking to expand its exploration into China and therefore would like to issue more shares next year to fund the exploration. The company's top management is compensated partly with stock options. One of the company's wells...
Your client has been offered a money market security with a par value £ 1000 that...
Your client has been offered a money market security with a par value £ 1000 that matures in one year in the UK market. The current price on the market is £ 954. The current exchange rate (S0) is 1.54 $/£. You also know that one year from now the exchange rate will be at 1.38 $/£. What is the effective yield of this security if your client holds the bond until maturity?
Patient A has been diagnosed with PD, hypertension, and dyslipidemia for 15 years, she’s been taking...
Patient A has been diagnosed with PD, hypertension, and dyslipidemia for 15 years, she’s been taking levodopa-carbidopa and amantadine twice daily, olmesartan in the morning, amlodipine in the evening, and atorvastatin before sleeping. One night, her daughter reported that she was seen having a panic attack and explained that she saw an unidentified being in her room, and from then on she’s having a hard time sleeping because it may occur again. When the patient underwent several lab tests, no...
One aspect of international trade that has seen quite a bit of coverage since the election...
One aspect of international trade that has seen quite a bit of coverage since the election of Donald Trump is that of tariffs. While the use of tariffs as a means of engaging in economic and geopolitical policy is certainly not new, the Trump Administration has opted to use them in a manner much different than what Americans are accustomed to seeing. Your assignment is to read this article from the Washington Post and in 250-500 words explain how you...
The web has been around for quite some time. It has not always been the robust...
The web has been around for quite some time. It has not always been the robust information resource that we find ourselves using today. Many parts of the web have evolved into technologies that find ourselves needing to use more often than not. How do you feel websites have changed over the last decade? What is new about how they work and what we can do with them?
Your factory has been offered a contract to produce a part for a new printer. The...
Your factory has been offered a contract to produce a part for a new printer. The contract would last for three​ years, and your cash flows from the contract would be $5.01 million per year. Your upfront setup costs to be ready to produce the part would be $8.05 million. Your discount rate for this contract is 8.1%. a. What is the​ IRR? b. The NPV is $4.84 ​million, which is positive so the NPV rule says to accept the...
Your factory has been offered a contract to produce a part for a new printer. The...
Your factory has been offered a contract to produce a part for a new printer. The contract would last for three​ years, and your cash flows from the contract would be 5.08 million per year. Your upfront setup costs to be ready to produce the part would be $8.09 million. Your discount rate for this contract is 7.8% . a. What is the​ IRR? b. The NPV is $5.05 ​million, which is positive so the NPV rule says to accept...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT