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 of $250,000 per year will remain constant for the first five years. Then the rental income will increase by 10% for every five-year interval over the remaining time of the asset. That is, 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 the operating expenses, including income taxes will be $85,000 for the first year and that they will increase by $5,000 each year after thereafter. You also estimate that razing the building and selling the lot on which it stands will realize a net amount of $50,000 at the end of the 25-year period. If you had the opportunity to invest your money elsewhere and thereby earn interest at rate of 12% per annum, what would be the maximum amount you would be willing to pay for the building and lot at the present time?
ANSWER1. Given that,Considering purchasing an old office building with an estimated remaining service life of 25 years{:[(0-5)" years "=$250","000" rental income "],[(6-10)" years "=$275","000"],[(11-15)" years "=$302","500"],[(15-20)" years "=$332","750"111"],[(20-25)" Years "=$366.025"]:}Operating ¿ maintenance costs =$85,000 IIst year increasing =$5000 cach year thereafter Salvage value of the facility =$50,000 end of 25 -years peviodNow,Letus the maximum amount an individual will be the net present value of cash flows.Calculating maximum amount (A_(0)) an individual is willing to pay PW(i)=A_(0)+[A(F//A,i,n)](P//F,i,n)-A(P//A,i,n)-G(P//G,i,n)where,pw(i) = Net present worthP= present value of the sum of moneyF= Futare value of the sum of moneyG : Gradient applicable to the problem at handA= Anrual amount that is consistent in the cash flow Seviesi= interest raten= Number of levms that the money is forThe net present ... See the full answer