A commercial building, containing space for stalls, can be purchased for P6.2 million. A prospective buyer estimates that during the next 15 years he can obtain annual rentals of at least P325,000 from the property and that the annual out-of-pocket disbursements will not exceed P85,000. He believes that he should be able to dispose the property at the end of 15 years at not less than P700,000. Annual taxes and insurance will total 2.5% of the firs cost. Use Future Worth. (a) Assuming he has sufficient equity capital to purchase the property, and that the average return he is obtaining from his capital is 20% Would you recommend the investment? (b) What recommendation would you make if he had to borrow 25% of the required capital, on the basis of 10-year amortization with interest of 18%? (c) If the entire capital can be obtained by floating bonds at 15% that will mature in 10 years, what would you recommend? Sinking fund interest is 15%.
SUBJECT: ENGINEERING ECONOMICS
NOTES: 2 DECIMAL ONLY
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QUESTION:
A commercial building, containing space for stalls, can be purchased for P6.2 million. A prospective buyer estimates that during the next 15 years he can obtain annual rentals of at least P325,000 from the property and that the annual out-of-pocket disbursements will not exceed P85,000. He believes that he should be able to dispose the property at the end of 15 years at not less than P700,000. Annual taxes and insurance will total 2.5% of the firs cost. Use Future Worth.
(a) Assuming he has sufficient equity capital to purchase the property, and that the average
return he is obtaining from his capital is 20% Would you recommend the investment?
(b) What recommendation would you make if he had to borrow 25% of the required capital, on
the basis of 10-year amortization with interest of 18%?
(c) If the entire capital can be obtained by floating bonds at 15% that will mature in 10 years, what would you recommend? Sinking fund interest is 15%.
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