Ben Ryatt, 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 $690,000-$50,000 for the land and $640,000 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 Ryatt is unsure whether he should keep it or sell it. His alternatives are: Keep the property. Professor Ryatt's accountant has kept careful records of the income realized from the property over the past 9 years. These records indicate the following annual revenues and expenses: $ 165,000 $ 29,400 Rental receipts Less building expenses: Utilities Depreciation of building Property taxes and insurance Repairs and maintenance Custodial help and supplies 18,900 20,500 11,400 44,400 124,600 Net operating income $ 40,400 Professor Ryatt makes a $13,400 mortgage payment each year on the property. The mortgage will be paid off in 9 more years. He has been depreciating the building by the straight-line method, assuming a salvage value of $9,900 for the building, which he still thinks is an appropriate figure. He feels sure that the building can be rented for another 13 years. He also feels sure that 13 years from now the land will be worth 2.30 times what he paid for it. Sell the property. A realty company has offered to purchase the property by paying $202,000 immediately and $18,000 per year for the next 13 years. Control of the property would go to the realty company immediately. To sell the property, Professor Ryatt would need to pay the mortgage off, which could be done by making a lump-sum payment of $84,000. Professor Ryatt requires a 9% rate of return. (Ignore income taxes.) Click here to view Exhibit 8B-1 and Exhibit 8B-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. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places and intermediate calculations to nearest dollar amount.) Item Year(s) Amount of Cash Flows 9% Factor of Cash Flows Present Value Keep the property: Annual loan payment 1-9 Annual net cash inflow Resale value of the property Present value of cash flows 1-13 13 b. Calculate the net present value of cash flows using total cost approach if he sells the property. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places and intermediate calculations to nearest dollar amount.) Item Year(s) Amount of Cash Flows 9% Factor + Present Value of Cash Flows Sell the property: Now Now Now | D Payoff of mortgage Down payment received Annual payments received Present value of cash flows c. Would you recommend he keep or sell the property? Keep the property Sell the property