Question

You are thinking of investing in a warehouse that has a 10-year lease outstanding at a fixed lease rent of $100,000 a year. The maintenance expenses on the warehouse average $15,000 a year, and the real estate taxes average $20,000 per year. You plan to own the warehouse till the lease expires 10 years from now. After that, you plan to sell it, and you estimate you could sell it for about the same $800,000 value as it is selling today, less 6% sales commission. (You don’t pay commission when you buy, but have to pay commission when you sell.) Assume no depreciation is allowed for tax purposes, and you have to pay 30% tax on your net rental income. If you are required to earn 10% rate of return on this purchase, will you create value or destroy value by buying this warehouse for $800,000 today? How much value will be created or destroyed? Please also calculate the IRR of this investment.

Answer #1

Brief Exercise 21-24
Marin, Inc. has entered an agreement to lease an old warehouse
with a useful life of 5 years and a fair value of $36,000 from
United Corporation. The agreement stipulates the following.
●
Rental payments of $8,633 are to be
made at the start of each year of the 5-year lease. No residual
value is expected at the end of the lease.
●
Marin must reimburse United each
year for any real estate taxes incurred for the...

"You are investing $X immediately in a stock that you will keep
for 10 years. At the end of 10 years, the stock will be worth
$12,373 with a probability of 0.52 and worth $19,197 with a
probability of 0.48. When you sell the stock, you will need to pay
taxes on the profit earned from selling the stock (i.e., taxes on
the difference between the selling and buying prices of the stock).
The tax rate will be 14% with...

You plan to open your own wine business. The cost of plant,
property and equipment is $500,000. You already have the money for
the initial cost which you could invest at the same level of risk
and expect to earn 10%. You think you can sell 1 million
bottles/year at $1/per bottle. Your costs are $200,000/per year to
keep the factory running plus $0.50/bottle produced. Your tax rate
is 50% and you plan to operate this business for 5-years. You...

Your first job out of college will pay you $84,000 in year 1
(exactly one year from today). You estimate that your salary will
grow at 6% per year for 45 years (compounded annually), when you'll
stop working. If the applicable discount rate is 12%, what is the
present value of these future earnings today? Round to the nearest
cent.
You own a 10-acre vineyard and earn income by selling your
grapes to wineries. Your vineyard is currently planted to...

Five years ago you incurred a 10-year term loan that required
annual payments of $1,150 per year. You have made four payments in
previous years and the fifth payment is due today. The note holder
proposes that you buy back this note today for $4,395. Would it pay
you to borrow the money at the bank at 13% interest rate and buy
back this note (hint: calculate the market value of the loan and
compare with the price for which...

You bought a 10-year zero-coupon bond with a face value of
$1,000 and a yield to maturity of 2.7% (EAR). You keep the bond for
5 years before selling it. The price of the bond today is P 0 = F (
1 + r ) T = 1,000 1.027 10 = 766.12
If the yield to maturity is still 2.7% when you sell the bond at
the end of year-5, what is your personal ANNUAL rate of return?

You bought a 10-year
zero-coupon bond with a face value of $1,000 and a yield to
maturity of 3.4% (EAR). You keep the bond for 5 years before
selling it.
The price of the bond
today is P0=F(1+r)T=1,0001.03410=P0=F(1+r)T=1,0001.03410= 715.8
If the yield to
maturity is still 3.4% when you sell the bond at the end of year-5,
what is your personal annual rate of return?

Suppose you purchase a 10-year bond with 6.8% annual coupons.
You hold the bond for four years, and sell it immediately after
receiving the fourth coupon. If the bond's yield to maturity was
4.9% when you purchased and sold the bond, a. What cash flows will
you pay and receive from your investment in the bond per $100 face
value? b. What is the annual rate of return of your
investment?

Suppose you purchase a 10-year bond with 6.4% annual coupons.
You hold the bond for four years, and sell it immediately after
receiving the fourth coupon. If the bond's yield to maturity was
5.4% when you purchased and sold the bond,
a. What cash flows will you pay and receive from your investment
in the bond per $100 face value?
b. What is the annual rate of return of your investment?

a. Assume that Social Security promises you $42,000 per year
starting when you retire 45 years from today (the first $42,000
will get paid 45 years from now). If your discount rate is 4%,
compounded annually, and you plan to live for 15 years after
retiring (so that you will receive a total of 16 payments
including the first one), what is the value today of Social
Security's promise? The value today of Social Security's promise
is $____?
b. Assume...

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