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 $210,000 per year will remain constant for the first five years. Then the rental income will increase by 20% for every five-year interval over the remaining life of the asset. That is, the annual rental income would be $252,000 for years 6 through 10, $302,400 for years 11 through 15, $362,880 for years 16 through 20, and $435,456 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 $6,000 each year thereafter. You also estimate that razing the building and selling the lot on which it stands will realize a net amount of $52,000 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 S million. (Round to three decimal places.)
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 $210,000 per year will remain constant for the first five years. Then the rental income will increase by 20% for every five-year interval over the remaining life of the asset. That is, the annual rental income would be $252,000 for years 6 through 10, $302,400 for years 11 through 15, $362,880 for years 16 through 20, and $435,456 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 $6,000 each year thereafter. You also estimate that razing the building and selling the lot on which it stands will realize a net amount of $52,000 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 S million. (Round to three decimal places.)
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 19P
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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, which leads you to
believe that the current rental income of $210,000 per year will remain constant for the first five years. Then the rental income will increase by 20% for every five-year interval over
the remaining life of the asset. That is, the annual rental income would be $252,000 for years 6 through 10, $302,400 for years 11 through 15, $362,880 for years 16 through 20.
and $435,456 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 $6,000 each
year thereafter. You also estimate that razing the building and selling the lot on which it stands will realize a net amount of $52,000 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.
C
The maximum amount you would be willing to pay is S million. (Round to three decimal places.)
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