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 Subject: Finance/Accounting NPV and DCFs Category: Business and Money > Finance Asked by: blogjob-ga List Price: \$20.00 Posted: 19 Jul 2005 11:24 PDT Expires: 18 Aug 2005 11:24 PDT Question ID: 545423
 Hi. Am working on a fractional ownership project (vacation ownership - where one home is sold in tenths to ten different owners. each owner is guaranteed one month of use of their home and the remaining 85 days at the end of the year can be used as space available time free of charge). question is: i would like to know which makes more sense: as a developer, should i rent the home every year or should i sell it to ten different owners (assuming this is a hot market). All figures in USD Givens: Construction cost for the home is \$1,000,000 USD Sales Price for the home is \$250,000 per fraction * 10 fractions = \$2,500,000 (this is a one time fee) Maintenance Dues every year for perpuity is \$5,000 per fraction * 10 fractions = \$50,000. Assume a price increase of 5% year on year. interest rate approx 12%. with regards to renting the home assume: i expect a +ve cash flow of \$100,000 USD in renting the home per year. interest rate approx 12%. Operating expenses for both purchase and rent would approx be the same so you can disregard. Can you use the necessary financial tools (npv/dcf/irr etc) to give me an educated response. Thanks very much. Request for Question Clarification by omnivorous-ga on 19 Jul 2005 11:39 PDT Blogjob -- A couple of things deseerve clarification here: 1. the sale generates immediate tax consequences -- do you have any assumptions on taxes, given a sale? 2. alternately, keeping the house and renting it generates potential depreciation (but only on the structure and not the land). Again, any assumptions about tax bracket? 3. in the rental assumption (\$100K/year) you don't forecast any increases in rental income -- though you have maintenance rising at 5% per year. Note that after about 14 years your rental income will be less than your maintenance with those numbers. Best regards, Omnivorous-GA Clarification of Question by blogjob-ga on 19 Jul 2005 12:17 PDT 1. not sure what the tax implications are as of now. ignore tax assumptions? wld just like a ballpark estimate. 2. ignore. 3. rentals shld go up approx 5% a year as well.