our 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, eads you to believe that the current rental income of $280,000 per year will remain constant for the first five years. Then the rental income will increase by 20 avery five-year interval over the remaining life of the asset. That is, the annual rental income would be $336,000 for years 6 through 10, $403.200 for years 11 through 15, $483,840 for years 16 through 20, and $580,608 for years 21 through 25 You estimate that operating expenses, including income taxes, will be 577,000 for the first year and that they will increase by $4,000 each year thereafter You also estimate that razing the building and selling the lot on which it stan will realize a net amount of $41,000 at the end of the 25-year period. If you had the opportunity to invest your money elsewhere and thereby earn interest at the of 11% 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 / 11% per year The maximum amount you would be willing to pay is $ million (Round to three decimal places)
our 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, eads you to believe that the current rental income of $280,000 per year will remain constant for the first five years. Then the rental income will increase by 20 avery five-year interval over the remaining life of the asset. That is, the annual rental income would be $336,000 for years 6 through 10, $403.200 for years 11 through 15, $483,840 for years 16 through 20, and $580,608 for years 21 through 25 You estimate that operating expenses, including income taxes, will be 577,000 for the first year and that they will increase by $4,000 each year thereafter You also estimate that razing the building and selling the lot on which it stan will realize a net amount of $41,000 at the end of the 25-year period. If you had the opportunity to invest your money elsewhere and thereby earn interest at the of 11% 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 / 11% per year The maximum amount you would be willing to pay is $ million (Round to three decimal places)
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 14P
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H11.
Transcribed Image Text: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, wi
leads you to believe that the current rental income of $280,000 per year will remain constant for the first five years. Then the rental income will increase by 20%
every five-year interval over the remaining life of the asset. That is, the annual rental income would be $336,000 for years 6 through 10, $403,200 for years 11
through 15, $483,840 for years 16 through 20, and $580,608 for years 21 through 25 You estimate that operating expenses, including income taxes, will be
$77,000 for the first year and that they will increase by $4,000 each year thereafter You also estimate that razing the building and selling the lot on which it stanc
will realize a net amount of $41,000 at the end of the 25-year period. If you had the opportunity to invest your money elsewhere and thereby earn interest at the r
of 11% 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 / 11% per year.
GIFS
The maximum amount you would be willing to pay is S
million (Round to three decimal places)
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