Chapter 11, Problem 11AP

Landover Corporation is looking for a larger office building to house its expanding operations. It is considering two alternatives. The first is a newly constructed building at a cost of $6 million. It would require only minor modifications to meet Landover’s needs, at an estimated cost of $500,000. The second building was constructed in 1910 and is a certified historic structure. It could be purchased for $3 million but would require an additional $4 million in renovations to be suitable for Landover.

1. a. Calculate Landover’s allowable rehabilitation credit if it chooses to purchase and renovate the certified historic structure, and the after-tax purchase price of the building. Assume Landover would claim the credit ratably over years 0 through 4. Landover uses a 4 percent discount rate to calculate present value.
2. b. Based on your analysis, which building should Landover acquire?
3. c. How might your analysis and conclusion change if Landover is currently experiencing net operating losses and does not expect to pay regular tax for several years?