Barton Laski, professor of languages at a southern university, owns a small offi
ID: 2536047 • Letter: B
Question
Barton Laski, 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 $570,000-$52,000 for the land and $518,000 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 Laski is unsure whether he should keep it or sell it. His alternatives are Keep the property. Professor Laskis 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 Less building expenses $ 153,000 S 28,200 Utilities Depreciation of building Property taxes and insurance Repairs and maintenance Custodial help and supplies 17,700 19.300 10,200 43,200 118,600 Net operating income $ 34,400 Professor Laski makes a $12,200 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 S8,700 for the building, which he still thinks is an appropriate figure. He feels sure that the building can be rented for another 15 years. He also feels sure that 15 years from now the land will be worth 1.00 times what he paid for it. Sell the property. A realty company has offered to purchase the property by paying $190,000 immediately and $20,000 per year for the next 15 years. Control of the property would go to the realty company immediately. To sell the property, Professor Laski would need to pay the mortgage off, which could be done by making a lump-sum payment of $72,000. Professor Laski requires a 11% rate of return. (Ignore income taxes.) Click here to view Exhibit 11B-1 and Exhibit 11B-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. (Use the appropriate table to determine the discount factor(s) and round final answers to the nearest dollar amount.) Net present value b. Calculate the net present value of cash flows using total cost approach if he sells the property. (Use the appropriate table to determine the discount factor(s) and round final answers to the nearest dollar amount.) Net present valueExplanation / Answer
Solution:
Solution:
a. The annual net cash inflow from rental of the property would be:
Net operating income ……………………………..34,400
Add back depreciation …………………………….17,700
Annual net cash inflow ……………………………$52,100
Given this figure, the present value analysis would be as follows:-
Item Year Amount of cash flows 11% factor Present value
Keep the property
Annual loan payment 1-10 (12,200) 5.88923 (71,848)
Annual net cash inflow 1-15 52,100 7.19087 374,664
Resale value of the property 15 60,700* 0.209 12,687
*Land = $52,000 x 1.00 = $52,000, Building $8700. Total
Present value of cash flows $315,482
b.
Sell the property
Payoff mortgage Now (72,000) 1.000 (72,000)
Down payment received Now 190,000 1.000 190,000
Annual payments received 1-15 20,000 7.19087 143,817
Present value of cash flows $261,817
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.