Your firm is considering purchasing an old office building with an estimated rem

Question

Your firm is considering purchasing an old office building with an estimated remaining service life of 25 years. Recently, the tenants signed a long-term lease, which leads you to believe that the current rental income o $290 000 per ear wire na start or he st ve years The erenta nco me wil increase 20% or every five-year interval over the remaining life of the asset. That is, the annual rental income would be $348,000 for years 6 through 10, $417,600 for years 11 through 15, S501,120 for years 16 through 20, and $601,344 for years 21 through 25. You estimate that operating expenses, including income taxes, will be $82,000 for the first year and that they will increase by $2,000 each year thereafter. You also estimate that razing the building and selling the lot on which it stands will realize a net amount of $46,000 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 10% per annum, what would be the maximum amount you would be willing to pay for the building and lot at the present time? Click the icon to view the interest factors for discrete compounding when-10% per year. The maximum amount you would be willing to pay is Sthousand. (Round to the nearest whole number.)

Explanation / Answer

601344+46000(Scrap)

The maximum amount should be $2,447,975.

YEAR CASH FLOW (RENT) (A) EXPENSES (B) (A-B) (C) PV FACTOR (D) PV@10%C*D) 1 $290000 82000 208000 0.909 189072 2 $290000 84000 206000 0.826 170156 3 $290000 86000 204000 0.751 153204 4 $290000 88000 202000 0.683 137966 5 $290000 90000 200000 0.621 124200 6 348000 92000 256000 0.564 144384 7 348000 94000 254000 0.513 130302 8 348000 96000 252000 0.467 117684 9 348000 98000 250000 0.424 106000 10 348000 100000 248000 0.386 95728 11 417600 102000 315600 0.350 110460 12 417600 104000 313600 0.319 100038 13 417600 106000 311600 0.290 90364 14 417600 108000 309600 0.263 81425 15 417600 110000 307600 0.239 73516 16 501120 112000 389120 0.218 84828 17 501120 114000 387120 0.198 76650 18 501120 116000 385120 0.180 69322 19 501120 118000 383120 0.164 62832 20 501120 120000 381120 0.149 56787 21 601344 122000 479344 0.135 64711 22 601344 124000 477344 0.123 58713 23 601344 126000 475344 0.112 53239 24 601344 128000 473344 0.102 48281 25

601344+46000(Scrap)

130000 517344 0.093 48113 TOTAL 2447975

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