A newly built business property, containing space for a store and two offices, can

be purchased for P1.2 million. A prospective buyer estimates that during the next 10 years he can obtain annual rentals of atleast P373,000 from the property

and that the annual out-of-pocket disbursements will not exceed P60,000. He

believes that he should be able to dispose the property at the end of 10 years at

not less than P700,000. Annual taxes and insurance will total 2.5% of the first cost.

(a) Assuming he has sufficient equity capital to purchase the property, and

that the average return he is obtaining from his capital is 20%, would you

recommend the investment?

(b)What recommendation would you make if he had to borrow 25% of the

required capital, on the basis of 10-year amortization with interest of 18%?

(c) If the entire capital can be obtained by floating bonds at 15% that will

mature in 10 years, what would you recommend? Sinking fund interest is 15%