Question Solved1 Answer 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?

4H5MDL The Asker · Economics

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?

More
See Answer
Add Answer +20 Points
Community Answer
E0ZQO7 The First Answerer
See all the answers with 1 Unlock
Get 4 Free Unlocks by registration

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