You manage a real estate investment company. One year ago, the company purchased 10 parcels of land distributed throughout the community for $10 million each. A recent appraisal of the properties indicates that five of the parcels are now worth $8 million each, while the other five are worth $16 million each.
Ignoring any income received from the properties and any taxes paid over the year, calculate the investment company’s accounting earnings and its economic earnings in each of the following cases:
a. The company sells all of the properties at their appraised valuestoday.
b. The company sells none of the properties.
c. The company sells the properties that have fallen in value andkeeps the others.
d. The company sells the properties that have risen in value and keepsthe others.
e. After returning from a property management seminar, an employee recommends the company adopt an end-of-year policy ofalways selling properties that have risen in value since purchase,and always retaining properties that have fallen in value. The employee explains that with this policy the company will never show aloss on its real estate investment activities. Do you agree with theemployee? Why, or why not?
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