Accounting

PROBLEM 12-17A

Keep or Sell Property

(LO1)

CHECK FIGURE

PV of cash flows for the alternative of keeping the property: $251,543

Ben Ryatt, professor of languages at Southern University, owns a small office building adjacent to the university campus. He acquired the property 12 years ago at a total cost of $560,000 — $52,000 for the land and $508,000 for the building. He has just received an offer from a realty company that wants to purchase the property; however, the property has been a good source of income over the years, so Professor Ryatt is unsure whether he should keep it or sell it. His alternatives are:

Keep the property. Professor Ryatt’s accountant has kept careful records of the income realized from the property over the past 10 years. These records indicate the following annual revenues and expenses:

| |Rental receipts................................ | |$150,000 |

| |Less building expenses: | | |

| |Utilities.......................................|$28,600 | |

| |.. | | |

| |Depreciation of building........... |17,800 | |

| |Property taxes and insurance.. |19,500 | |

| |Repairs and maintenance........ |10,500 | |

| |Custodial help and supplies..... |43,500 |119,900 |

| |Net operating income.................... | |$30,100 |

Professor Ryatt makes a $12,600 mortgage payment each year on the property. The mortgage will be paid off in 10 more years. He has been depreciating the building by the straight-line method, assuming a salvage value of $9,600 for the building, which he still thinks is an appropriate figure....