--%>
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 : Abnormal profits based on fundamental

    If it is possible to make abnormal profits based on fundamental analysis, you can conclude that the market is: A) Not weak-form efficientB) Weak-form efficientC) Not semi-strong-form efficientD) Semi-strong-form e

    		•
  • Q : How form a portfolio with higher

    Does this make any sense to form a portfolio comprised of companies along with a higher return/dividend?

    		•
  • Q : Define Initial public offering or IPO

    Initial public offering: An initial public offering (IPO) otherwise called as stock market launch, is the first time company selling stock to public. Usually raised for capital expansion and to become publicly traded company. Investment banking firms

    		•
  • Q : How WACC should be computed to begin a

    I cannot seem to begin a valuation. In order to compute E + D = VA (FCF; WACC) I require the WACC and to compute the WACC I need D and E. Where must I start?

    		•
  • Q : State Exploitation of favorable market

    Exploitation of favorable market conditions: The firms after estimating WCR are in a position to clearly identify their status of excess current assets. After this realization they can use this knowledge to encash conditions arising in market even for

    		•
  • Q : How could we project exchange rates How

    How could we project exchange rates within order to be capable to forecast exchange differences?

    		•
  • Q : Estimate stock's current price A

    A company currently pays a dividend of $3.75 per share, D0 = 3.75. It is estimated that the company's dividend will grow at a rate of 15% percent per year for the next 2 years, then the dividend will grow at a constant rate of 7% the

    		•
  • Q : Investors are irrational or naive

    Explain how companies with substandard financial history can draw the attention of investors. Are investors irrational or naive?

    		•
  • Q : Explain method to analyze and to value

    Are there any methods to analyze and to value seasonal businesses?

    		•
  • Q : Purchaing or leasing problem Crawford

    Crawford Corporation is planning to lease a machine for the next 4 years for an annual lease payment of $3,000 paid in advance, plus a non-refundable initial fee of $3,000. There is a 1-year delay for the tax benefits of leasing. Crawford may buy the machine, deprecia

    		•