Suppose that a property owner plans on spending $15,000 per year over the next 5 years on maintenance and repairs.However,if she does not spend this amount,she will not be able to keep rents at market levels,vacancies will increase,and the resale value of the property in 5 years will be lower.Assume that she would lose about $7,000 a year in net income and would realize a loss of $85,000 in lower property value at the time of sale if maintenance is not maintained on the property.Determine the difference between the present value of the cost of maintaining the property and the loss to the owner if the property is not maintained assuming
That the owner could earn a 7 percent return on any funds not invested in maintenance and repairs?

Question

Quizplus · Accepted Answer

The present value of the maintenance costs is calculated by discounting $15,000 per year for 5 years at a 7% rate. The present value of the averted loss includes both the annual income loss of $7,000 for 5 years and the $85,000 loss in property value, also discounted at 7%. The difference between these two present values is $27,802, with the maintenance costs being less than the averted loss.

Suppose That a Property Owner Plans on Spending $15,000 Per