Q) A landlord wants an advice on how she might decide whether or not to add...

Q) A landlord wants an advice on how she might decide whether or not to add additional bathroom. The cost of the additional is $10,000. The interest rate is 5% . she can expect to get an additional $ 450 per annum on rent as a result for the life of the bathroom.

She should do the investment?
If the additional rents were $440, should she do the investment?
What would be the position if the interest rate were 4%?

PLEASE GIVE YOUR ANSWER IN WORD FORMAT. DO NOT CONVERT INTO IMAGE.

Solutions

Expert Solution

(a)
Cost of investment   10000
Additional rent or cash flows   450
Interest rate   5%
Time not given. so assume perpetual

Present value of perpetual payments = cash flows / Interest rate
450/5%
9000

NPV = Present value of cash flows - Present value of cash inflows
9000-10000
-1000

NPV is -$1000. so investment should not be made.

(b)
additional rent or free cash flows
Present value of free cash flows = 440/5%
8800

NPV = 8800-10000
-1200

NPV is -$1200. So investment should not be made.

(c)
If interest rate = 4%
1st case
Present value of free cash flow of $450 = 450/4%
11250

NPV = 11250 - 10000
1250

NPV is 1,250. So investment should be made.

2nd case
Present value of free cash flow of $440 = 440/4%
11000

NPV = 11000 - 10000
1000

NPV is 1,000. So investment should be made.

jeff jeffy answered 11 months ago

Next > < Previous

Related Solutions

The builder of a new movie theater is trying to decide how many screens she wants....

The builder of a new movie theater is trying to decide how many screens she wants. Below are her estimate of the number of patrons the complex will attract each year depending on the number of screens available. Number of screens: Total number of patrons 1 50,000 2 95,000 3 135,000 4 170,000 5 195,000 The owner expects to net $2 per ticket sold. Construction costs are $1,000,000 per screen. The screen can always be resold for $1,000,000 at the...

Once a business computes its cost of capital, discuss how a manager might decide whether to...

Once a business computes its cost of capital, discuss how a manager might decide whether to take on a project or not. How are capital project investments prioritized?

Q. (a) Tegan is trying to decide if a coin is fair. She flips it 100...

Q. (a) Tegan is trying to decide if a coin is fair. She flips it 100 times and gets 63 heads. Please explain why it might make sense to view 63 heads as enough evidence to conclude the coin is unfair. (b) Leela is trying to decide if a coin is fair. She flips it 100 times and gets 63 heads. Please explain why it might NOT make sense to view 63 heads as enough evidence to conclude the coin...

please add the explanation 10. The government has been trying to decide whether or not to...

please add the explanation 10. The government has been trying to decide whether or not to purchase any of the new, advanced missiles it has developed. One of the arguments in favor of purchasing the missiles is that since so much money has been spent on their development it would be a waste of money not to buy them now. What is the major problem with this argument? A) It includes erosion costs in the decision-making process. B) It includes...

For each sentence in the following passage, decide whether it is necessary to add quotation marks...

For each sentence in the following passage, decide whether it is necessary to add quotation marks or cite a source. Explain your reasoning. Many people have made money investing in real estate in the past couple of years. However, what goes up, comes back down (1). EZHomeBuilders, a corporation that builds luxury homes, announced that falling real estate values are causing them to scale back some projects and cancel others (2). After they announced this, shares of EZHomeBuilders fell 50...

You are considering adding a new security to your portfolio. To decide whether you should add...

You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: A. Expected return and variance only B. Expected return only C. Expected return, variance, and covariance D. Expected return and covariance only

Erinn must decide whether to add the cost of towing insurance to her car insurance policy....

Erinn must decide whether to add the cost of towing insurance to her car insurance policy. The additional cost is $50 annually. She has an older car that is not super reliable. She decides to analyze her expected annual towing costs and then she will decide whether it is cost effective for her to buy the towing insurance or not. She estimates the probability that her car will break down and need to be towed once during the year is...

How might an organisation decide the frequency of auditing activities?

Suppose a company wants to decide whether to lease or purchase an asset. Purchase: The capital...

Suppose a company wants to decide whether to lease or purchase an asset. Purchase: The capital cost required to purchase the asset is $1,000,000 (at time zero) with a salvage value of $500,000 at the end of the 5th year. The purchased asset can be depreciated based on MACRS 5-year life depreciation with the half year convention (table A-1 at IRS (https://www.irs.gov/publications/p946) over six years (from year 0 to year 5). Lease: The asset can be leased for 5 years...

Juanita is deciding whether to buy a skirt that she wants, as well as where to...

Juanita is deciding whether to buy a skirt that she wants, as well as where to buy it. Three stores carry the same skirt, but it is more convenient for Juanita to get to some stores than others. For example, she can go to her local store, located 15 minutes away from where she works, and pay a marked-up price of $130 for the skirt:Travel Time Each WayPrice of a SkirtStore(Minutes)(Dollars per skirt)Local Department Store15130Across Town3086Neighboring City6060Juanita makes $70 an...

Subjects