Your firm is considering purchasing an old office building w

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.)

Solution

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