Ben Ryatt, professor of languages at a university in western Canada, owns a small office building adjacent
Question:
Ryatt makes a $12,600 mortgage payment each year on the property. The mortgage will be paid off in 10 more years. He has been depreciating the building by the straight-line method, assuming a salvage value of $9,600 for the building, which he still thinks is an appropriate figure. He feels sure that the building can be rented for another 16 years. He also feels sure that 16 years from now the land will be worth 2.5 times what he paid for it. Sell the property. A real estate company has offered to purchase the property by paying $150,000 immediately and $23,000 per year for the next 16 years. Control of the property would go to the real estate company immediately. To sell the property, Ryatt would need to pay the mortgage off, which could be done by making a lump-sum payment of $71,000.
Required:
Ryatt requires a 14% rate of return. Would you recommend he keep or sell the property? Show computations using the total-cost approach to net present value. Ignore income taxes.
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Step by Step Answer:
Managerial Accounting
ISBN: 978-1259024900
9th canadian edition
Authors: Ray Garrison, Theresa Libby, Alan Webb