PROBLEM 104 Deciding Whether to Keep or Sell Property CHECK FIGURE Keeptheproperty alternative: $309,402 PV of cash flows Raul Martinas. a professor of languages at Eastern Unive rsity. owns a small ofce building adjacent to the university campus. He acquired the property 10 years ago at a total cost of $530.000that is. $50.000 for the land and $480000 for the building. He hasjust received an o'er from a realty companythat wants to purchase the property: however. the property has been a good source of income over the years. and so Martinas is unsure whether he should keep it or sell it. His alternatives are as follows: a. Keep the property. Martinas's accountant has kept careful records of the income realized from the property over the past 10 years. These records indicate the following annual revenues and expenses: Rental receipts $140,000 Less: Building expenses: Utilities $25,000 Depreciation of building 16000 Property taxes and insurance 18,000 Repairs and maintenance 9,000 Custodial help and supplies l lm Net operating income g Martinas makes a $12.000 mortgage payment each year on the property. The mortgage will be paid o' in eight more years. He has been depreciating the building by the straight-line method. assuming a salvage value of $80000 for the building. which he still thinks is an appropriate gure. He feels sure that the building can be rented for another 15 years. He also feels sure that 15 years from now the land will be worth three times what he paid for it. b. Sei'i the propern: A realty company has offered to purchase the property by paying $115000 immediately and $26500 per year for the next 15 years. Control of the property would go to the realty company immediately. To sell the property. Martinas would need to pay the mortgage off. which could be done by making a lump-sum payment of 5590000. Required: Assume that Martinas requires a 12% rate of return. Would you recommend that he keep or sell the property? Show computations using the total cost approach to net present value