Reference no: EM132168879

Question: A store owner, Joe Lang, believes his business has suffered from the lack of adequate customer parking space. Thus, when he was offered an opportunity to buy an old building and lot next to his store, he was interested. He would demolish the old building and make off-street parking for 20 customers' cars. Joe estimates that the new parking would increase his business and produce an additional before-income-tax profit of $7000 per year. It would cost $2500 to demolish the old building. Mr. Lang's accountant advised that both costs (the property and demolishing the old building) would be considered to comprise the total value of the land for tax purposes, and it would not be depreciable. Mr. Lang would spend an additional $3000 right away to put a light gravel surface on the lot. This expenditure, he believes, may be charged as an operating expense immediately and need not be capitalized. To compute the tax consequences of adding the parking lot, Joe estimates that his combined state and federal incremental income tax rate will average 40%. If Joe wants a 15% after-tax rate of return from this project, how much could he pay to purchase the adjoining land with the old building? Assume that the analysis period is 10 years and that the parking lot could always be sold to recover the costs of buying the property and demolishing the old building.