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A newly-built business property, containing space for a store and two offices, can be purchased for P1,200,000. A prospective buyer estimates that during the next 10 years he can obtain annual rentals of at least P458,460 from the property and that the annual out-of-pocket disbursements will not exceed P60,000. He believes that he should be able to dispoose of the property at the end of 10 years at not less than P700,000. Annual taxes and insurance will total 2.5% of the first cost. a. Assume he has sufficient equity capital to purchase the property and that the average return he is obtaining from hi capital is 20%. Would you recommend it? b. What recommendation would you make if he had to borrow 25% of the required capital, on the basis of a 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 your recommend? Sinking fund interest is 15%

A newly-built business property, containing space for a store and two offices, can be purchased for P1,200,000. A prospective buyer estimates that during the next 10 years he can obtain annual rentals of at least P458,460 from the property and that the annual out-of-pocket disbursements will not exceed P60,000. He believes that he should be able to dispoose of the property at the end of 10 years at not less than P700,000. Annual taxes and insurance will total 2.5% of the first cost. a. Assume he has sufficient equity capital to purchase the property and that the average return he is obtaining from hi capital is 20%. Would you recommend it? b. What recommendation would you make if he had to borrow 25% of the required capital, on the basis of a 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 your recommend? Sinking fund interest is 15%

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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A newly-built business property, containing space for a store and two offices, can be purchased for P1,200,000. A prospective buyer estimates that during the next 10 years he can obtain annual rentals of at least P458,460 from the property and that the annual out-of-pocket disbursements will not exceed P60,000. He believes that he should be able to dispoose of the property at the end of 10 years at not less than P700,000. Annual taxes and insurance will total 2.5% of the first cost. a. Assume he has sufficient equity capital to purchase the property and that the average return he is obtaining from hi capital is 20%. Would you recommend it? b. What recommendation would you make if he had to borrow 25% of the required capital, on the basis of a 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 your recommend? Sinking fund interest is Oe 15%.
Transcribed Image Text:A newly-built business property, containing space for a store and two offices, can be purchased for P1,200,000. A prospective buyer estimates that during the next 10 years he can obtain annual rentals of at least P458,460 from the property and that the annual out-of-pocket disbursements will not exceed P60,000. He believes that he should be able to dispoose of the property at the end of 10 years at not less than P700,000. Annual taxes and insurance will total 2.5% of the first cost. a. Assume he has sufficient equity capital to purchase the property and that the average return he is obtaining from hi capital is 20%. Would you recommend it? b. What recommendation would you make if he had to borrow 25% of the required capital, on the basis of a 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 your recommend? Sinking fund interest is Oe 15%.
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