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Raul Martinas, a professor of languages at Eastern University,owns a small office building adjacent to the university campus. Heacquired the property 10 years ago at a total cost of $530,000—thatis, $50,000 for the land and $480,000 for the building. He has justreceived an offer from a realty company that wants to purchase theproperty; however, the property has been a good source of incomeover the years, and so Martinas is unsure whether he should keep itor sell it. His alternatives are as follows:

a.

Keep the property. Martinas’s accountant has keptcareful records of the income realized from the property over thepast 10 years. These records indicate the following annual revenuesand expenses: Professor Martinas makes a $12,000 mortgage paymenteach year on the property. The mortgage will be paid off in eightmore years. He has been depreciating the building by thestraight-line method, assuming a salvage value of $80,000 for thebuilding, which he still thinks is an appropriate figure. He feelssure that the building can be rented for another 15 years. He alsofeels sure that 15 years from now the land will be worth threetimes what he paid for it.

Rental receipts				$	140,000
Less: Building expenses:
Utilities	$	25,000
Depreciation of building		16,000
Property taxes and insurance		18,000
Repairs and maintenance		9,000
Custodial help and supplies		40,000			108,000
Net operating income				$	32,000

b.

Sell the property. A realty company has offered topurchase the property by paying $175,000 immediately and $26,500per year for the next 15 years. Control of the property would go tothe realty company immediately. To sell the property, ProfessorMartinas would need to pay the mortgage off, which could be done bymaking a lump-sum payment of $90,000.

  

Click here to view Exhibit 10-1 and Exhibit 10-2, to determinethe appropriate discount factor(s) using tables.

  

Required:

Assume that Professor Martinas requires a 12% rate of return.Compute net present value in favor of (or against) keeping theproperty using the total-cost approach. (Round discountfactor(s) to 3 decimal places and other intermediate calculationsto the nearest dollar amount.)

Would you recommend that he keep or sell the property?

Keep the property Sell the property