- Ten years ago, Jacobson Recovery purchased a wrecker for $285,000 to move disabled 18-wheelers. He anticipated a salvage value of $50,000 after 10 years. During this time his average annual revenue totaled $52,000.
(a) Did he recover his investment and a 12% per year return?
(b) If the annual M&O cost was $10,000 the first year and increased by a constant $1000 per year, was the AW positive or negative at 12% per year? Assume the $50,000 salvage was realized.
- Sylvia has received a $500,000 inheritance from her favorite, recently deceased aunt in Hawaii. Sylvia is planning to purchase a condo in Hawaii in the same area where her aunt lived all her life and to rent it to vacationers. She hopes to make 8% per year on this purchase over an ownership period of 20 years. The condo’s total first cost is $500,000, and she conservatively expects to sell it for 90% of the purchase price. No annual M&O costs are considered in the analysis.
(a) What is the capital recovery amount?
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(b) If there is a real boom in rental real estate 10 years in the future, what sales price (as a percentage of original purchase price) is necessary at that time (year 10) to realize the same amount as the 8% return expected over the 20-year ownership period?