A commercial property is available for a price of £25.5 million and a developer is interestedin purchasing it in order to turn it into a rental property. The developer estimates that the totalrefurbishments costs will amount to £3.1 million, which will be incurred exactly three monthsafter purchase.A potential tenant company has agreed to occupy and rent out the property six months afterthe date of purchase. The lease agreement states that the company will rent the office blockfor 15 years and will then purchase the property at the end of the rental period for £28million. It is further agreed that rents will be paid quarterly in arrears and will be increasedevery 3 years at the rate of 3.5% per annum compound. The initial rent has been set at £2.7million per annum with the first rental payment is due exactly three months following the dateof occupation.Calculate the net present value of the profit from this investment assuming that thedeveloper earns a rate of return of 9% per annum effective.

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Answered: A commercial property is available for…

SWFT Individual Income Taxes

43rd Edition

ISBN:9780357391365

Author:YOUNG

Publisher:YOUNG

Chapter18: Accounting Periods And Methods

Section: Chapter Questions

Problem 16DQ

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An owner of the Atrium Tower Office Building is currently negotiating a five-year lease with ACME Consolidated Corporation for 20,000 rentable square feet of office space. ACME would like a base rent of $15 per square foot with step-ups of $1 per year beginning one year from now. ATRIUM would provide ACME a $53,000 moving allowance and $130,000 in tenant improvements (TIs). What is the effective rent (per SF) assuming a discount rate of 10%?
An investor purchases a plot of land for £400,000 and intends to construct a building which will be leased out as office space. Construction will start in 6 months' time and will last 18 months. Construction costs will be incurred continuously at a rate of £600,000 per annum. The investor will be able to lease out the building immediately after construction ends. Rental income will be received continuously for 20 years, starting at £100,000 per annum in the first year, £150,000 in the second year, £200,000 in the third year and thereafter increasing by 5% every 12 months. Maintenance costs will be incurred (during those 20 years) half-yearly in arrears, starting at £5,000 for the first half-year and increasing by 2% every half-year. After renting out the building for 20 years, the investor expects to sell the land and building for £800,000. Calculate the net present value of the project at an effective rate of interest of 10% per annum.
An investor purchased an office block six months ago for £4.5 million. The investor will spend a further £850,000 on refurbishments in three months' time. A company has agreed to occupy the office block six months from now. The lease agreement states that the company will rent the office block for fifteen years and will then purchase the property at the end of the fifteen-year rental period for £5.5 million. It is further agreed that rents will be paid monthly in advance and will be increased every three years at the rate of 3% per annum compound. The initial rent has been set at £700,000 per annum with the first rental payment due immediately following the date of occupation. Assuming an effective rate of interest of 9% per annum, calculate the investor's expected net proceeds from the project valued at the time of purchase. Assume further that the investor does not pay tax. (Using formulas, no tables) answer: PV= 2,330,108
Cassandra Company decides to enter the leasing business. The entity acquires a specialized packaging machine for P3,000,000 cash and leases it for a period of 6 years after which the machine is to be returned to Cassandra Company for disposition. The guaranteed residual value of the machine is P200,000. The lease term is arranged so that a return of 12% is earned by Cassandra Company. What is the annual rental payable in advance required to yield the desired return?
An equipment that currently costs $750,000 is needed for construction at the project site for 5 years.The Project Company have been presented with the alternative of leasing the equipment for an annual rental payment of$210,000.Should the project company lease or buy the equipment,if,i. Rental payments are made at the end of the year? ii.Rental payments are made at the beginning of the year?
An owner of the ATRIUM Tower Office Building is currently negotiating a five-year lease with ACME Consolidated Corporation for 20,000 rentable square feet of office space. ACME would like a base rent of $11 per square foot (PSF) with step-ups of $1 per year beginning one year from now. Required: a. What is the present value of cash flows to ATRIUM under the above lease terms? (Assume a 10% discount rate.) b. The owner of ATRIUM believes that base rent of $11 PSF in (a) is too low and wants to raise that amount to $15 with the same $1 step-ups. However, now ATRIUM would provide ACME a $53,000 moving allowance and $130,000 in tenant improvements (Tls). What would be the present value of this alternative to ATRIUM? c. ACME informs ATRIUM that it is willing to consider a $14 PSF with the $1 annual stepups. However, under this proposal, ACME would require ATRIUM to buyout the one year remaining on its existing lease in another building. That lease is $6 PSF for 20,000 SF per year. If ATRIUM…
Liverpool Limited urgently needs to upgrade its utility capacity. They require a new generator costing R1 200 000. Thegenerator can be leased or owned and the terms are as follows:Cost of leasing:The lease would require annual end-of-year payments of R320 200 over the four years.Service and insurance costs of R78 500 per annum will be borne by the lessor.The lessee will exercise its option to purchase the asset for R80 000 at the termination of the lease in four years.Cost of owning:The cost could will be settled in cash due to the companies excess cashflows after winning the Premier league in 2023.Liverpool Limited will pay maintenance cost of R6 000 per month. Depreciation charges are based on the straight-linemethod. At the end of the period the generator will be sold at its residual value ofR75 000.Additional Information:· the company is in the 28% tax bracket· the after-tax cost of the debt is 13% Calculate the after-tax cash outflows and the net present value of the cash outflows…
Liverpool Limited urgently needs to upgrade its utility capacity. They require a new generator costing R1 200 000. Thegenerator can be leased or owned and the terms are as follows:Cost of leasing:The lease would require annual end-of-year payments of R320 200 over the four years.Service and insurance costs of R78 500 per annum will be borne by the lessor.The lessee will exercise its option to purchase the asset for R80 000 at the termination of the lease in four years.Cost of owning:The cost could will be settled in cash due to the companies excess cashflows after winning the Premier league in 2023.Liverpool Limited will pay maintenance cost of R6 000 per month. Depreciation charges are based on the straight-linemethod. At the end of the period the generator will be sold at its residual value ofR75 000.Additional Information:· the company is in the 28% tax bracket· the after-tax cost of the debt is 13%Required:3.1 Calculate the after-tax cash outflows and the net present value of the…
An owner of the ATRIUM Tower Office Building is currently negotiating a five-year lease with ACME Consolidated Corporation for 20,000 rentable square feet of office space. ACME would like a base rent of $10 per square foot (PSF) with step-ups of $1 per year beginning one year from now. Required: a. What is the present value of cash flows to ATRIUM under the above lease terms? (Assume a 10% discount rate.) b. The owner of ATRIUM believes that base rent of $10 PSF in (a) is too low and wants to raise that amount to $14 with the same $1 step-ups. However, now ATRIUM would provide ACME a $52,800 moving allowance and $128,000 in tenant improvements (TIs). What would be the present value of this alternative to ATRIUM? c. ACME informs ATRIUM that it is willing to consider a $13 PSF with the $1 annual stepups. However, under this proposal, ACME would require ATRIUM to buyout the one year remaining on its existing lease in another building. That lease is $5 PSF for 20,000 SF per year. If…
On 1 January 2012, Main Contractors Ltd leased a new machine from the Solvitol Finance Company. The following details were obtained from the lease agreement. The capital cost of the machine at 1 January 2012 was £50,000. Six half-yearly payments of £11,000 each are payable in advance, commencing 1 January 2012 in the primary term. Three annual payments of £100 are payable in the secondary term. Main Contractors Ltd has not yet decided if it will take advantage of the secondary term. The estimated useful life of the machine is five years, with a nil residual value. The estimated residual value after three years is £10,000 and, of this, 95% is accountable to Main Contractors Ltd. It is the policy of Main Contractors Ltd to use the straight line method of providing for depreciation. Using (a) the sum of the digits method and (b) the actuarial method, calculate the effect of this rental on the annual accounts of Main Contractors Ltd to 31 December for the relevant…
Macinski Leasing leases a new machine to Sharrer SA. The machine has a cost of €70,000 and fair value of €95,000. Under the 3-year, non- cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2019. Macinski expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentalsare payable on each December 31, beginning December 31, 2019.Instructions1. Prepare the journal entry at commencement of the lease for Macinski.2. Prepare the journal entry at commencement of the lease for Sharrer.3. Prepare the journal entry at commencement of the lease for Sharrer, assuming (1) Sharrer does not know Macinski's implicit rate (Sharrer's incremental borrowing rate is 9%), and (2) Sharrer incurs initial directs costs of €10,000.
Suppose that in addition to the $67,299 annual rental payments, Kimberly-Clark is also required to pay $5,000 for insurance costs each year on the building directly to the lessor, Sheffield Storage. How would this executory cost affect the initial measurement of the lease liability and right-of-use asset?

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