7.11 Commercial Real Estate, Inc., is considering the purchase of a $4 million building to lease. The
Question:
7.11 Commercial Real Estate, Inc., is considering the purchase of a $4 million building to lease.
The economic life of the building will be 20 years. Assume that the building will be fully depreciated by the straight-line method and its market value in 20 years will be zero. The company expects that annual lease payments will increase at 3 percent per year. The appropriate discount rate for cash flows of lease payments is 13 percent, while the discount rate for depreciation is 9 percent. The corporate tax rate is 34 percent. What is the least Commercial Real Estate should ask for the first-year lease? Assume that the annual lease payment starts right after the signature of the lease contract.
Step by Step Answer:
Corporate Finance
ISBN: 9780071229036
6th International Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe