--%>
Assignment Help - homework help

Selling or purchasing problem

Atlas Realty Company is interested in buying a house and renting it out for $12,000 a year, collecting the rent in advance each year. This will depreciate the house over 25 years; however sell it after 15 years at twice its purchase price. The maintenance expenditures and real estate taxes, at the end of each year, are $1000 annually. The risk-adjusted discount rate for Atlas is 10% and its income tax rate 25%. Find the price of the house that Atlas should pay so that it can make $5000, in current dollars, from this project.

E

Expert

Verified

Let P be the purchase price of the house. Book value of house after 15 years = P - (P/25)*15 = 0.4P
Excess on book value = 2P – 0.4P = 1.6P
Tax on residual value = 1.6P*0.25 = 0.4P

160_123.jpg

-P + 9000 + 60777.75 + 0.07367P – 179.25 + 0.38P = 5000
69598.5 – 0.54633P = 5000
P = $118,241

   Related Questions in Corporate Finance

  • Q : Problem about commercial and fiscal

    A court assigned to me (as an auditor and economist) a valuation of a market butcher’s. The butcher’s did not give any simple income statements or any valuable information that I could use in my valuation. This is a small business with just two workers, th

    		•
  • Q : Define stock variable Stock variable :

    Stock variable: It is a variable whose value is measured or evaluated at a point of time.

    		•
  • Q : NPV and Other Investment Criteria The

    The XYZ Manufacturing Company is considering the below investment proposal. The initial investment is $100,000. It was an expected economic life of 10 years. The net cash flow in the initial year is expected to be $25,000 and annual net cash flow is expected to develo

    		•
  • 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 : Types of lease contracts What are the

    What are the types of lease contracts which are seen in practice?

    		•
  • Q : Calculate the risk-free rate You have

    You have been given the following information on two corporations; you are to assume that thesecurities are correctly priced. My Corp, Inc. has a Beta of 1.25 and an Expected Return of .145;Your Corp, Inc. has a Beta of .75 and an Expected Return of .095. Based on the

    		•
  • Q : How could we acquire an indisputable

    How could we acquire an indisputable discount rate?

    		•
  • Q : Explain deducing yield curve model

    Explain deducing yield curve model of HJM.

    		•
  • Q : Is the price of futures the excellent

    Is the price of futures the excellent estimate of €/$ exchange rate?

    		•
  • Q : Financial engineering financial

    financial engineering examples,benifits,disadvantages

    		•