--%>
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 : Illustrates financial consultant has

    A financial consultant obtains various valuations of my company when this discounts the Free Cash Flow (FCF) as opposed to when this uses the Equity Cash Flow. Is it correct?

    		•
  • Q : Do expected equity flows coincide with

    Do expected equity flows coincide along with expected dividends?

    		•
  • Q : Explain the branching structure of the

    Explain the branching structure of the binomial model.

    		•
  • Q : Company Valuation Project Hello, Need a

    Hello, Need a top-notch finance expert to complete a company valuation assignment for me for a class. Will attach details. Please inform me if you have your graduate level resource who is good with company valuations and executive summary writeup of the analysis please. English writing skills ar

    		•
  • Q : International financial what can we

    what can we expanded opportinity set of international finance?

    		•
  • 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 : 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 : 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 : Active versus Passive fund managers

    Active vs. Passive fund managers: Passive fund managers adopt a long term buy and hold strategy. Usually, stocks are purchased so that the portfolio’s returns will track those of an

    		•