Sell-or-Rent Decision
Response to the following problem:
Clarence Gleason has inherited an apartment complex. He is now faced with the decision of whether to sell or to rent the property. A real estate adviser believes that Clarence should rent the property, because he could receive $65,000 per year for 10 years and then could sell the property for $500,000. A development company has offered Clarence $200,000 down and promises to pay $50,000 per year for the next 15 years. The land has a remaining mortgage of $130,000. If Clarence sells the complex, he will have to pay that sum now. If he rents the property, he will have to pay the mortgage of $130,000 over 10 annual payments. The mortgage rate is 12%. The cost of capital is 16%.
Required:
1. Calculate the net present value of each alternative.
2. Interpretive Question: Discuss the qualitative factors that might affect the decision to sell or rent.