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Geico Geico is considering expanding an existing plant on a piece of land it already owns

Geico
Geico is considering expanding an existing plant on a piece of land it already
owns. The land was purchased 15 years ago for $325,000, and its current market
appraisal is $820,000. A capital budgeting analysis shows that the plant
expansion has a
net
present value of $130,000. The expansion will cost $1.73 million, and the
discounted cash inflows are $1.86 million. The expansion cost of $1.73 million
does not include any provision for the cost of the land. The manager preparing
the analysis argues
that
the historical cost of the land is a sunk cost, and since the firm intends to
keep the land whether or not the expansion project is accepted, the current
appraisal value is irrelevant. Should the land be included in the analysis? If
so, how?

Housing
Markets
A
home identical to yours in your neighborhood, sold last week for $150,000. Your
home has a $120,000 assumable, 8% mortgage (compounded annually) with 30 years
remaining. An assumable mortgage is one that the new buyer can assume at the
old terms, continuing to make payments at the original interest rate. The house
that recently sold did not have an assumable mortgage; that is, the buyers had
to finance the house at the current market rate of interest, which is 15%. What
price should you ask for your home? A third home, again identical to the one
that sold for $150,000, is also being offered for sale. The only difference
between this third home and the $150,000 home is the property taxes. The
$150,000 home’s property taxes are $3,000 per year, while the third home’s
property taxes are $2,000 per year. The differences in the property taxes are
due to vagaries in how the property tax assessors assessed the taxes when the
homes were built. In this tax jurisdiction, once annual taxes are set, they are
fixed for the life of
the
home. Assuming the market rate of interest is still 15%, what should be the
price of this third home?

Mortgage
Department Suppose you are the manager of a mortgage department at a savings
bank. Under the state usury law, the maximum interest rate allowedfor
mortgages is 10% compounded annually. 1.
If you granted a $50,000 mortgage at the maximum rate for 30 years, what would
be the equal annual payments? 2.
If the current market internal rate on similar mortgages is 12%, how much money
does the bank loseby
issuing the mortgage described in (a)? 3.
The usury law does not prohibit banks from charging points. One point means
that the borrower pays 1% of the $50,000 loan back to the lending institution at
the inception of the loan. That is, if one point is charged, the repayments are
computed as in (a), but the borrower receives only $49,500. How many points
must the bank charge to earn 12% on the 10% loan?

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