Section 7: Capital Budgeting Decision - Keep or Sell the Property (18 Marks) Professor's Use Only You acquired a property 10 years ago at a total cost of $850,000: $50,000 for the land and $800,000 for the building. You just received an offer form a real estate company that wants to purchase the property. Keep the Property. The records below indicate annual expenses and revenues realized from the property over the past 10 years : Rental Receipts S 200,000.00 Less; building expenses Depreciation S 20,000.00 Utilities S 30,000.00 Property taxes and insurance 22,000.00 Repairs and maintance S 20,000.00 Custodial help and supplies 50,000.00 S 142,000.00 Operating income 58,000.00 16 You make $30,000 mortgage payment each year on the property. The mortgage will be paid off in 10 more years. You have been depreciating the building by the straight- line method assuming a salvage value of $0. You are sure that the building can be rented for another 16 years. 17 You also feel that 16 years from now the land will be worth 3 times what you paid for it. 18 19 Sell the Property, A real estate company has offered to purchase the property by paying $200,000 immediately and $30,000 per year for the next 10 years. Control of the property would go the real estate company immediately. 20 To sell the property, you would need to pay the mortgas off, which could be done by making a lump-sum payment of $155,000. 21 22 Required: 23 Assuming a 10% required rate of return, would you recommend he keep or sell the property? Show computations using the total-cost approach to net present value. Ignore income taxes. 24 26