Carrie Fisher is currently leasing the space of her walk-in Botox clinic, Age Wars, at $2500 per month. The owner of the building provides basic maintenance valued at $500 per month and Age Wars covers all other costs. The clinic is a non-profit organization. The owner of the building wants to either sell the building to Carrie, or require her to sign a 10-year lease. The area around the clinic has undergone considerable change over the past two years. Old apartment buildings have been rehabbed and converted to condos. New restaurants are filling up spaces formerly occupied by pawn shops. Depreciation of the building is a constant $6000 per year. Salvage value is assumed to be $300,000. You should convert all cash flows in annual cash flows.
A) You find out that Carrie estimated the salvage value by assuming 8% percent annual price appreciation from the current appraised value. In other words the current appraised value is equivalent to the Present Value and the Salvage Value is the Future Value. What is the appraised value?
B) Carrie can obtain a 30-year loan at 7% interest rate. What is the maximum purchase price that Carrie would be willing to pay in order to buy the clinic rather than lease it?
C) What is the NAL assuming the landlord will sell the building at the appraised value from part A?
D) What if the neighborhood was changing for the worse? In fact, Carrie predicts no price appreciation over the time period. What is the NAL assuming no price appreciation and using the appraised value as the purchase price?
E) Return to the original “8% price appreciation” scenario (part a). What if Age Wars was a for-profit organization with a tax rate of 40% and annual depreciation of $6000? What is the maximum purchase price Carrie would pay to purchase the clinic rather than lease it?
F) Why is your answer to part b different than part e? What is the role of taxes?