Raul Martinas, a professor of languages at Eastern University, owns a small office building adjacent to the university campus. He acquired the property 10 years ago at a total cost of $530,000—that is, $50,000 for the land and $480,000 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, and so Martinas is unsure whether he should keep it or sell it. His alternatives are as follows:
| Raul Martinas, a professor of languages at Eastern University, owns a small office building adjacent to the university campus. He acquired the property 10 years ago at a total cost of $530,000—that is, $50,000 for the land and $480,000 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, and so Martinas is unsure whether he should keep it or sell it. His alternatives are as follows: |
Raul Martinas, a professor of languages at Eastern University, owns a small office building adjacent to the university campus. He acquired the property 10 years ago at a total cost of $530,000-that is, $50,000 for the land and $480,000 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, and so Martinas is unsure whether he should keep it or sell it. His alternatives are as follows a. Keep the property. Martinas\'s accountant has kept careful records of the income realized from the property over the past 1U years. These records indicate the following annual revenues and expenses Professor Martinas makes a $12,000 mortgage payment each year on the property. The mortgage wil be paid off in eight more years. He has been depreciating the building by the straight-line method assuming a salvage value of $80,000 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 three times what he paid for it $140,000 Rental receipts Less: Building expenses Utilities Depreciation of building Property taxes and insurance Repairs and maintenance Custodial help and supplies $25,000 16,000 18,000 9,000 40,000 108,000 Net operating income 32,000 b. Sell the property. A realty company has offered to purchase the property by paying $175,000 immediately and $26,500 per year for the next 15 years. Control of the property would go to the realty company immediately. To sell the property, Professor Martinas would need to pay the mortgage off which could be done by making a lump-sum payment of $90,000 Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using tables Required: Assume that Professor Martinas requires a 12% rate of return. Compute net present value in favor of (or against) keeping the property using the total-cost approach. (Round discount factorís) to 3 decimal places and other intermediate calculations to the nearest dollar amount.) Net present value Would you recommend that he keep or sell the property? O Keep the property Sell the property
Computation of Annual net Cash Flow Net Operating Income 32000 Depreciation 16000 Annual Net Cash Flow 48000 Computation of Present Value Analysis Item Year Amount PVF@ 12% Present Values Keep the Factory Annula loan Payment 1-8 -12000 4.968 -59616 Annuall Net Cash In Flow 1-15 48000 6.811 326928 Reseale Value of the Property 15 230000 0.183 42090 Present value of Cahs Flow 309402 Sell the Property Pay off of mortgage Now -90000 1 -90000 Down Aymment reccievd Now 175000 1 175000 Annual Payment Received 1-15 26500 6.811 180491.5 Present Value of Cahs Flow 265491.5 Net Present Value in Favour of Keeping the Property 43910.5 * Land, $50000X3= $150000, Plus Building , $80000=$230000 Hence it\'s advisable to Keep the property
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