Real estate problem, Eric Rowan is planning to buy a house for $155,000 by borrowing

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?

View Complete Question

Comments & Conversion

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 : What is EBITDA What are Earnings before

What are Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA)?

Q : Problem on Zero coupon bonds

Robertsons, Inc. is planning to enlarge its specialty stores into 5 other states and finance the expansion by issuing 15-year zero coupon bonds with a face value of $1,000. When your opportunity cost is 8 % and similar coupon-bearing bonds will recompense semi-annuall

Q : Continuously compounded rate of return

Solve for the stated annual rate, r equal to the continuously compounded rate of return implicit in turning $1 at the end of 1925 (beginning of 1926) into these reported valued from RWJ9 in 2008 Figure below: 1. Determine the state

Q : Problem on Bank branch networks While

While banks across the United States and Europe are cutting down their number of branches, the number of bank branches in Hong Kong has increased in the same period. Hong Kong Monetary Authority statistics show the number of bank branches in Hong Kong at the end of 20

Q : In which cases use different WACCs Is

Is this possible to use different WACCs within order to discount each year’s flows? In which cases?

Q : Define the term Stock Market crash

Stock Market Crash was responsible for the Great Depression. Middle class families lost all their savings as they had gambled the market on margin.Those banks which were under the loan ofbrokers’ started removing money out of the savings account

Q : Convertible Bonds-Corporate Bonds State

State the term Convertible Bonds in Corporate Bonds?

Q : What is Project Budget Project Budget :

Project Budget: Collecting all costs related with completing a project is budget process. The Project Management Institute states that "aggregating the predictable costs of individual actions or work projects (establishing) an authorized cost baseline

Q : When the dividend shows real money The

The dividend is the part of the net income which the company distributes to shareholders. When the dividend shows real money, the net income is also real money. Is it true?

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.

Discover Q & A

Leading Solution Library

Avail More Than 1412480 Solved problems, classrooms assignments, textbook's solutions, for quick Downloads

No hassle, Instant Access

Start Discovering

18,76,764

1942542
Asked

3,689

Active Tutors

1412480

Questions
Answered

Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!

Submit Assignment