Your firm is considering purchasing an old office building


Your firm is considering purchasing an old office building with an estimated remaining service life of 25 years. Recently, the tenants signed long-term leases with fixed rental rates for the first 5 years; thus, the current rental income of $150,000 per year will remain constant for the first 5 years. Then the rental income will increase by 10% for every 5-year interval over the remaining life of the asset. Therefore, the annual rental income would be $165,000 for years 6 through 10, $181, 500 for years 11 through 15, $199, 650 for years 16 through 20, and $219, 615 for years 21 through 25. You estimate that annual operating expenses, including income taxes, will be $45,000 for the first year and that they will increase by $3,000 each year thereafter. You also estimate that razing the building and selling the lot on which it stands will yield 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 the rate of 12% per annum compounded annually, what would be the maximum amount (i.e., present worth) you would be willing to pay for the building and lot at the present time?

Request for Solution File

Ask an Expert for Answer!!
Financial Management: Your firm is considering purchasing an old office building
Reference No:- TGS01710943

Expected delivery within 24 Hours