Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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 $560,000$51,000 for the land and $509,000 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 Laski's accountant has kept careful records of the income realized from the property over the past8 years. These records indicate the following annual revenues and expenses:

Rental receipts $152,000

Less building expenses:

Utilities$ 28,100

Depreciation of building 17,600

Property taxes and insurance 19,200

Repairs and maintenance 10,100

Custodial help and supplies 43,100 118,100

Net operating income $33,900

Professor Laski makes a $12,100 mortgage payment each year on the property. The mortgage will be paid off in 8 more years. He has been depreciating the building by the straight-line method, assuming a salvage value of $8,600 for the building, which he still thinks is an appropriate figure. He feels sure that the building can be rented for another 16 years. He also feels sure that 16 years from now the land will be worth 1.12 times what he paid for it.

Sell the property.A realty company has offered to purchase the property by paying $152,000 immediately and $21,000 per year for the next 16 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 $71,000. Professor Laski requires a 12% rate of return. (Ignore income taxes.)

Click here to viewExhibit 11B-1andExhibit 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 value=

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Managerial Accounting

Authors: Ray Garrison, Eric Noreen and Peter Brewer

14th edition

978-007811100, 78111005, 978-0078111006

More Books

Students also viewed these Accounting questions

Question

2. Information that comes most readily to mind (availability).

Answered: 1 week ago

Question

3. An initial value (anchoring).

Answered: 1 week ago