In: Accounting
Own or rent analysis. Linda wants to purchase a property at the beginning of 2019 and plans to sell at the end of 2019. The loan payment is by annual and is fully amortizing FRM. The information for analysis is as below:
Property purchase price at the beginning of 2019 |
$200,000 |
LTV Ratio |
80% |
Annual Interest rate |
6% |
Loan term |
30 years |
Annual rent |
$15,000 |
Property sell price at the end of 2019 |
$235,000 |
Annual insurance |
$500 |
Annual maintenance |
$500 |
Marginal tax rate |
28% |
Property tax rate |
1.50% based on the purchase price at the beginning of 2019 |
Annual discount rate |
12% |
Selling expense |
6% of sell price at the end of 2019 |
No sales tax |
Please answer the question of whether Linda needs to make the purchase by calculating the cost of owning, benefit of owning, the NPV and IRR of this purchase.
Purchase Price of Machine | 200000 |
Loan to Value of Machine | 80% |
Loan Availment | 160000 |
Principal Inception | 40000 |
Annual Interest Rate | 6% |
Annual Discount Rate | 12% |
Loan Repayment Installment By-annually | 80000 |
Interest for First Six Month | 4800 |
Interest for Next Six Month | 2400 |
Present Value of Loan and Interest Repayment at Half yearly @12% | 80000 |
Present Value of Loan and Interest Repayment at year end @ 12% | 73571 |
Present Value of Loan and Interest Repayment at Half yearly @15% | 78884 |
Present Value of Loan and Interest Repayment at year end @ 15% | 71652 |
Present Value of Loan and Interest Repayment at Half yearly @20% | 77091 |
Present Value of Loan and Interest Repayment at year end @ 20% | 68667 |
Present Value of Loan and Interest Repayment at Half yearly @25% | 75378 |
Present Value of Loan and Interest Repayment at year end @ 25% | 65920 |
Sale Value | 235000 |
Annual Rent | 15000 |
Total Receipt at year end | 250000 |
Selling Expense 6% of Sale Value | 14100 |
Annual Maintenance | 500 |
Annual Insurance | 500 |
Property Tax (1.5% of opening value of property) | 3000 |
Interest Expense | 7200 |
Purchase price of property | 200000 |
Profit for the year | 24700 |
Tax @ 28% | 6916 |
Profit after tax | 17784 |
Cash Realisation at year end | 224984 |
Present value of cash realization at year end @ 12% | 200879 |
Present value of cash Outflow @ 12% | 193571 |
Net Present Value @12% | 7307 |
ROI @ 12% | 18.27% |
Present value of cash realization at year end @ 15% | 195638 |
Present value of cash Outflow @ 15% | 190536 |
Net Present Value @15% | 5102 |
Present value of cash realization at year end @ 20% | 187487 |
Present value of cash Outflow @ 20% | 185758 |
Net Present Value @20% | 1729 |
Present value of cash realization at year end @ 25% | 179987 |
Present value of cash Outflow @ 25% | 181298 |
Net Present Value @25% | -1311 |
IRR | 22.84389803 |
20%+[NPV @ 20%/(NPV @ 20% LESS NPV @ 25%) *5 | |
We should go for buy option |