--%>
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 : What are flow variables Flow variables

    Flow variables: Any variable, whose magnitude is evaluated over a time period, is termed as glow variable.

    		•
  • Q : Define Strong form market efficiency

    Strong form market efficiency: Strong form market efficiency defines that the price of a security in the market replicates all information—public and also private or within information. Strong form efficiency

    		•
  • Q : Affect the value of the stock Is the

     Is the value of this stock dependent on how long you plan to hold it? In other words, if your planned holding period were 2 years or 5 years rather than 3 years, would this affect the value of the stock today, P0? Explain your answer.<

    		•
  • Q : Explain essential hypotheses for

    Which are the essential hypotheses so that valuations of the Economic Value Added (EVA) give similar results to discounting cash flows?

    		•
  • Q : Problem on leveraged beta AB

    AB Restaurants has debt/equity ratio .25, and its leveraged beta is 1.5. Its tax rate is 30%, and its cost of equity is 15%. The risk-free rate is 5%. CD Restaurants has debt/equity ratio .4, and tax rate 35%. Find the cost of equity for CD.

    		•
  • Q : Zero coupon bonds problem Shana wants

    Shana wants to purchase 5-year zero coupon bonds with a face value of $1,000. Her opportunity cost is 8.5 %. Supposing annual compounding, what would be the present market price of such bonds? (Round to the closest dollar.) (a) $1,023  (b) $665  (c) $890&nbs

    		•
  • Q : Is the given affirmation of an

    Is the given affirmation of an accountancy expert true? “There valuation criterion that reflects the value of the shares of a company in the most accurate way is based on the amount of the equity of shareholder of its balance sheet. Stating that the value of sha

    		•
  • Q : Problem on exponential growth rate

    Atlanta Company stock is predicted to follow an exponential growth rate. The relationship among the current stock price P0, future price PT after time T, and continuously compounded rate of the return r, is: PT = P0eγT. The stock doesn’t pay any

    		•
  • Q : Profitability Ratios Profitability

    Profitability Ratios: These ratios comprise the Gross profit Margin, Net profit Margin, Operating Margin, Return on Equity (ROE), and Return on Total Assets. Such ratios help the firm to examine its profitability, the trend in profits and aid to take

    		•
  • Q : What is EBITDA What are Earnings before

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

    		•