Accounting Essay

587 words - 3 pages

PROBLEM 12-17A
Keep or Sell Property
(LO1)
CHECK FIGURE
PV of cash flows for the alternative of keeping the property: $251,543
Ben Ryatt, professor of languages at 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 — $52,000 for the land and $508,000 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 ...view middle of the document...

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 2.5 times what he paid for it.
Sell the property. A realty company has offered to purchase the property by paying $150,000 immediately and $23,000 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 $71,000.
Required:
Professor Ryatt requires a 14% rate of return. Would you recommend he keep or sell the property? Show computations using the total-cost approach to net present value.

The net annual cash inflow from rental of the property would be:

|Net operating income |$30,100 |
|Add back depreciation | 17,800 |
|Net annual cash inflow |$47,900 |

Given this figure, the present value analysis would be as follows:
| |Item |Year(s) |Amount of Cash Flows| |14% Factor |Present Value of Cash |
| | | | | | |Flows |
| |Keep the property: | | | | | |
| |Annual loan payment |1-10 |$(12,600) | |5.216 |$ (65,722) |
| |Net annual cash inflow |1-16 |$47,900  | |6.265 ...

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