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The Nebraska Institute of Science (NIS) pools all of its endowment funds so that it can obtain the benefits of a large and diverse investment portfolio. The institute recently acquired a commercial office building as an investment property. The cost was $12 million and its economic life was expected to be 15 years. Upon acquiring the building, NIS signed a 15-year lease with a tenant. The annual rent was $1.3 million, with the tenant responsible for all maintenance and other operating costs.

1. Suppose NIS charged depreciation and distributed to expendable funds the entire ‘‘income’’ earned on the office building.

a. What would be the total amount distributed over the 15-year life of the building?

b. Assuming that NIS’s estimate of economic life was correct, what would likely be the market value of the building when the lease expired? Would NIS have had available any cash for the acquisition of other assets to compensate for the decline in value of the building?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91625654

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