Barbara Thompson Is Considering the Purchase of a Piece of Business

question 3

Essay

Barbara Thompson is considering the purchase of a piece of business rental property containing stores and
offices at a cost of $350,000. Barbara estimates that annual receipts from rentals will be somewhere between
$35,000 and $45,000 but that annual disbursements, other than income taxes, would be fairly close to $18,000.
The property is expected to appreciate at an annual rate of 5%. Barbara expects to retain the property for 10
years once it is acquired. Then it will be depreciated on the basis of the 39-year real-property class (MACRS),
assuming that the property would be placed in service on January 1. Barbara's marginal tax rate is 30%, and her
MARR is 10%. What would be the minimum annual total of rental receipts that would make the investment
break- even?

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Definitions:

Ending Inventory

Ending inventory is the total value of goods available for sale at the end of an accounting period.

Net Markups

This term refers to the difference between the cost of a product and its selling price, minus any discounts or allowances.

Net Markdowns

The reduction in the selling price of goods, subtracted from the original or previous selling price, often to clear surplus inventory.