--%>
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 : Llustrate illiquidity risk and small

    My investment bank told me that beta given by Bloomberg incorporates the illiquidity risk and small cap premium since Bloomberg does well-known Bloomberg adjustment formula. Is it true?

    		•
  • Q : Explain modern quantitative

    Explain modern quantitative methodology for portfolio selection.

    		•
  • Q : Who explain match theoretical & market

    Who demonstrated that how to match theoretical and market prices for normal bonds?

    		•
  • Q : Problem on EBIT ABC Corporation stock

    ABC Corporation stock sells at $27 per share and its dividend per share is $1.20. ABC has price-earnings ratio of 16. The company contains $40 million worth of bonds, selling at par, with 8.5% coupon. The EBIT of ABC is of $12 million and its tax rate is 30%. Calculat

    		•
  • Q : Benefits of working capital requirement

    Benefits of working capital requirement estimation: • Helps to judge the efficiency of utilization of working capital in generation of sales • Cost of capital aspect

    		•
  • Q : State Transition Management Transition

    Transition Management: It is a financial service accessible to institutional investors who require making significant modifications to their portfolios, like merging, selling, or substantially restructuring them. This procedure can expose investors to

    		•
  • Q : Which method must use to valuate young

    Which method must we use to valuate young companies along with high growth but uncertain futures? Two illustrations were Boston Chicken and Telepizza while they began.

    		•
  • Q : Explain valuation method for

    We were assigned a valuation of a pharmaceutical laboratory’ shares. Which valuation method is further convenient?

    		•
  • Q : Leverage ratio problem Handy Inc has

    Handy Inc has debt-to-assets ratio of 40%, tax rate of 35%, and total value of $100 million. W. C. Handy, the CFO, would like to increase the leverage ratio to 42%, and he believes that there will be no change in the bankruptcy cost of the company. How many dollars wo

    		•
  • Q : Explain undervaluation of share on the

    Suppose we calculate g as ROE (1–p)/(1–ROE (1–p)) and the Ke by the CAPM. We replace both values into the formula PER = (ROE (1+g) – g)/ROE (Ke-g) but there PER we obtain is fully different from the one we get by dividing the quotation of the s

    		•