A newly-built business property, containing space for a store and two offices, can be purchased for 1,600,000. A prospective buyer estimates that during the next 11 years he can obtain annual rentals of at least 605,000 from the property and that the annual out-of-pocket disbursements will not exceed P90,000. He believes that he should be able to dispose of the property at the end of 11 years at not less than 540,000. Annual taxes and insurance will total 3.1% of the first cost.

a) Assume he has sufficient equity capital to purchase the property, and that the average return he is obtaining from his capital is 22%. Would you recommend the investment? Show complete solution

b) What recommendation would you make if he had to borrow 25% of the required capital, on the basis of a 12-year amortization with interest of 16%? Show complete solution

c) If the entire capital can be obtained by floating bonds at 15% that will mature in 12 years, what would you recommend? Sinking fund interest is 15%. Show complete solution