A building is appraised at $1 million. This estimate is based on forecasted net

Question

A building is appraised at $1 million. This estimate is based on forecasted net rent of $100,000 per year discounted at a 10% cost of capital [PV = 100,000/ 0.1 = 1,000,000]. The rent is the net of repair and maintenance costs and taxes. Suppose the building is currently uninhabitable. It will take one year and $250,000 of work (spent at the end of the year) to bring it into rentable condition. How much would you be willing to pay for the building today? Explain your calculations. Respond to at least two of your classmates’ posts.                   

Explanation / Answer

Statement showing calculation of Present Value Particulars Time PVF@10% Amount PV(Amount *PVF) Present Value of rental Payments at end of year1                         1.000                                      0.9091                         1,000,000.00                             909,090.91 Repairs at end of year 1                         1.000                                      0.9091                           (250,000.00)                           (227,272.73) Maximum amount that can be paid for building                             681,818.18 Present Value of rents at the end of year = 100,000/.10 Present Value of rents at the end of year = 1,000,000

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