Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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 $750,000$70,000 for the land and $680,000 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 Ryatts 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:

Rental receipts $ 171,000

Less building expenses:

Utilities $ 30,000

Depreciation of building 19,500

Property taxes and insurance 21,100

Repairs and maintenance 12,000

Custodial help and supplies 45,000 127,600

Net operating income $ 43,400

Professor Ryatt makes a $14,000 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 $9,500 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 2.20 times what he paid for it.

Sell the property. A realty company has offered to purchase the property by paying $208,000 immediately and $29,000 per year for the next 16 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 $90,000. Professor Ryatt requires a 12% rate of return. (Ignore income taxes.)

You must use spreadsheet functions or a financial calculator to solve these questions.

Required: a. Calculate the net present value of cash flows using total cost approach if he keeps the property. (Negative amount should be indicated by a minus sign. Round final answer to the nearest whole dollar.)

Net present value $

B. Calculate the net present value of cash flows using total cost approach if he sells the property. (Negative amount should be indicated by a minus sign. Round final answer to the nearest whole dollar.)

Net present value $

C. Would you recommend Professor Ryat to keep the property or to sell?

Sell the property

Keep the property

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

Comparative international accounting

Authors: Christopher nobes, Robert parker

9th Edition

273703579, 978-0273703570

More Books

Students also viewed these Accounting questions

Question

8. Do the organizations fringe benefits reflect diversity?

Answered: 1 week ago

Question

7. Do the organizations social activities reflect diversity?

Answered: 1 week ago