Your firm is considering purchasing an old office building with an estimated remaining service life of 20 years. Recently, the tenants signed a long-term lease, which leads you to believe that the current rental Income of $ 250,000 per year will remain constant for the first five years. Then the rental income will increase by 10% for every five-year interval over the remaining life of the asset. That is, the annual rental Income would be $ 275,000 for years 6 through 10, $ 302,500 for years 11 through 15 and $ 332,750 for years 16 through 20. You estimate that operating expenses, including income taxes, will be $ 80,000 for the first year and that they will increase by 5% each year thereafter. You also estimate that razing the building and selling the lot on which it stands will realize a net amount of $ 50,000 at the end of the 20- year period., What would be the maximum amount you would be willing to pay for the building and lot at the present time with an interest rate of 12% per year?

Your firm is considering purchasing an old office building with an estimated remaining service life of 20 years. Recently, the tenants signed a long-term lease, which leads you to believe that the current rental Income of $ 250,000 per year will remain constant for the first five years. Then the rental income will increase by 10% for every five-year interval over the remaining life of the asset. That is, the annual rental Income would be $ 275,000 for years 6 through 10, $ 302,500 for years 11 through 15 and $ 332,750 for years 16 through 20. You estimate that operating expenses, including income taxes, will be $ 80,000 for the first year and that they will increase by 5% each year thereafter. You also estimate that razing the building and selling the lot on which it stands will realize a net amount of $ 50,000 at the end of the 20- year period., What would be the maximum amount you would be willing to pay for the building and lot at the present time with an interest rate of 12% per year?

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter21: Costs And The Supply Of Goods

Section: Chapter Questions

Problem 17CQ

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