--%>
Assignment Help - homework help

Real estate problem

Eric Rowan is planning to buy a house for $155,000 by borrowing money at the rate of 9%. He expects to rent the house for 5 years, collecting $20,000 annual rent in advance each year. He thinks that he can sell the house for $175,000 after five years. Fulton has income tax rate of 30%. He will have to pay $5,000 annually in maintenance and real estate taxes, and he will depreciate the house on a straight-line basis for 20 years. The risk-adjusted discount rate in this project is 10%. When all the expenses are completely deductible, and all gains are taxable, should he undertake this project?

E

Expert

Verified

Since the depreciation is for 20 years and Eric will sell off the house after five years,

Book value of house after five years = 155000 - (155000/20)*5 = 116,250

Excess over book value = 58,750

Tax on Residual value = 58750*0.3 = 17,625

389_real estate.jpg

Hence this project is rejected. Eric must not undertake this project.

   Related Questions in Corporate Finance

  • Q : Road King Trucks Project I want to know

    I want to know how much do you charge for doing the project?

    		•
  • Q : Data Case Please assist with the

    Please assist with the attached Data Case assignment

    		•
  • Q : Explain definition of put–call parity

    Explain the definition of put–call parity described by Reinach.

    		•
  • Q : Corporate Earnings Analysis exercise

    Identify two comparable corporations.  Explain why you think they are comparable to your corporation. Earnings analysis:  Do an earnings analysis of your corporation.  Calculate and plot.

    Q : Is it possible to use a constant WACC

    Is this possible to use a constant WACC in the valuation of a company along with a changing debt?

    		•
  • Q : What is the value of stock Brushy

    Brushy Mountain Mining Company's ore reserves are being depleted, so its sales are falling. Also, its pit is getting deeper each year, so its costs are rising. As a result, the company's earnings and dividends are declining at the constant rate of 5% per year. I

    		•
  • Q : WCR lower cost of storage Inventory is

    Inventory is an important part of WCR estimation. It is a current asset, which depletes over period of time. Also, it requires creation of facility, which would help in storing the inventory and estimate the associated cost of maintaining and transporting it. The esti

    		•
  • Q : Explain few Spanish mutual funds

    Is this true that very little Spanish mutual funds outperform their benchmark? Isn’t this strange?

    		•
  • Q : Who were the creators of uncertain

    Who were the creators of uncertain volatility model?

    		•
  • Q : Markets are expected to be Volatile

    When Markets are expected to be Volatile: For the bear and bull strategy to yield gains, it is essential that the trader takes a view on the direction of the market i.e. either bearish or bullish, and accordingly implement the strategic choice. More o

    		•