7 35 points EmKay LLC purchases a new office building for S5

7) (35 points) EmKay LLC purchases a new office building for S500,000 and plans to keepit for 10 years. At the end of the 10-year period it is estimated that the market value of the office building will be S600,000. Building operation and maintenance (O&M;) costs are estimated to be $50,000 for the first year. Thereafter these O&M; costs are expected to increase by 10% over the previous year\'s costs. If Emkay LLC\'s TVOM is 10% per year compounded annually, what is the equivalent uniform annual rent that must be generated by this real-estate investment, in order to break-even?

Solution

Year Cash outflows PVf @ 10% Present value 0 -500000 1 -500,000 1 -50000 0.909091 -45,455 2 -55000 0.826446 -45,455 3 -60500 0.751315 -45,455 4 -66550 0.683013 -45,455 5 -73205 0.620921 -45,455 6 -80525.5 0.564474 -45,455 7 -88578.1 0.513158 -45,455 8 -97435.9 0.466507 -45,455 9 -107179 0.424098 -45,455 10 482102.6 0.385543 185,871 Present worth -723,219 Divide: Annuity factor for 10year 6.1446 Equivalent Annual cost -117700 Hence, The annual rental income shall be $ 117700 in order to break even.