You are considering the purchase of a parking deck close to your office building
ID: 2750856 • Letter: Y
Question
You are considering the purchase of a parking deck close to your office building. The parking deck is a 15-year old structure with an estimated remaining service life of 25 years. The tenants have recently signed long-term leases, which leads you to believe that the current rental income of $250,000 per year will remain constant for the first five years. Then the rental income will increase by 10% for every five-years interval over the remaining asset life. Thus the annual rental income would be $275,000 for years 6 through 10, $302,500 for years 11 through 15, $332,750 for years 16 through 20, and $366,025 for years 21 through 25. You estimate that operating expenses, including income taxes, will be $65,000 for the first year and that they will increase by $6,000 each year thereafter. You estimate that razing the building and selling a lot on which it stands will realize a net amount of $200,000 at the end of the 25-year period. If you had the opportunity to invest your money elsewhere and thereby earn interest at the rate of 15% per annum, what would be the maximum amount you would be willing to pay for the parking deck and lot at the present time? You are considering the purchase of a parking deck close to your office building. The parking deck is a 15-year old structure with an estimated remaining service life of 25 years. The tenants have recently signed long-term leases, which leads you to believe that the current rental income of $250,000 per year will remain constant for the first five years. Then the rental income will increase by 10% for every five-years interval over the remaining asset life. Thus the annual rental income would be $275,000 for years 6 through 10, $302,500 for years 11 through 15, $332,750 for years 16 through 20, and $366,025 for years 21 through 25. You estimate that operating expenses, including income taxes, will be $65,000 for the first year and that they will increase by $6,000 each year thereafter. You estimate that razing the building and selling a lot on which it stands will realize a net amount of $200,000 at the end of the 25-year period. If you had the opportunity to invest your money elsewhere and thereby earn interest at the rate of 15% per annum, what would be the maximum amount you would be willing to pay for the parking deck and lot at the present time?Explanation / Answer
Annual rental income= (250,000*5)+(275000*5)+(302,500*5)+(332,750*5)+(366,025*5)
= $5,801,250
Operating expenses including income taxes= $3,640,000
the maximum amount should be spent on the parking deck= 5,801,250- 3,640,000
= $2,161,250
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