A Corporation is considering to open an office in a new market area that would allow it to increase its annual sales by $1.8 million. Cost of goods sold is estimated to be 30 percent of the annual sales, and corporate overhead would be expected to increase by $180,000 not including the cost of either acquiring or leasing office space. The Corporation will also have to invest $1.5 million in office furniture, office equipment, and other up-front costs associated with opening the new office before considering the costs of owning or leasing the office space. A small office building could be purchased for its sole use by the corporation at a total price of $2.5 million, of which $500,000 is estimated for land value, and $2 million for its building value. The cost of the building would be depreciated over 30 years. The corporation is in a 30 percent tax bracket. An investor is willing to purchase the same building and lease it to the corporation for $200,000 per year for a term of 5 years, where the corporation will pay all real estate operating expenses (absolute net lease). Real estate operating expenses are estimated to be 45 percent of the lease payments. It is anticipated that the property value will increase over the lease term for a net sale price of $2.8 million at the end of the 5 years. If the property is purchased, it would be financed with an interest-only mortgage for $1.5 million at an interest rate of 7 per cent per annum with a balloon payment due in 5 years. Capital gain tax is estimated at $190,000 at sales. Assume all cash flows occur at the end of the year and discount rate is 10 per cent per annum. You must show all workings. b) What is the net present value from opening the new office under the assumption that it is owned?
A Corporation is considering to open an office in a new market area that would allow it to increase its annual sales by $1.8 million. Cost of goods sold is estimated to be 30 percent of the annual sales, and corporate overhead would be expected to increase by $180,000 not including the cost of either acquiring or leasing office space. The Corporation will also have to invest $1.5 million in office furniture, office equipment, and other up-front costs associated with opening the new office before considering the costs of owning or leasing the office space.
A small office building could be purchased for its sole use by the corporation at a total price of $2.5 million, of which $500,000 is estimated for land value, and $2 million for its building value. The cost of the building would be
An investor is willing to purchase the same building and lease it to the corporation for $200,000 per year for a term of 5 years, where the corporation will pay all real estate operating expenses (absolute net lease). Real estate operating expenses are estimated to be 45 percent of the lease payments.
It is anticipated that the property value will increase over the lease term for a net sale price of $2.8 million at the end of the 5 years. If the property is purchased, it would be financed with an interest-only mortgage for $1.5 million at an interest rate of 7 per cent per annum with a balloon payment due in 5 years.
b) What is the
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