Task briefing:

ABC Ltd. is a multinational that wants to invest in the real estate business in Barcelona.

Two alternatives are offered by the owner of a property in one of the most popular areas of the city.

Option A: Renting the property with a perpetual contract, meaning for ever and ever. In this case, the company has to pay 4,000 per month and the contract contains a clause stating that the rent price will be growing at a 0.07% monthly.

Option B: Acquiring the property with a mortgage scheme for 40 years. The current ownership is demanding an initial payment of 1,975,000 and a monthly amount of 2,500 .

The interest applicable rates are around 3.5% compounded yearly, this is supposed to be the market rate for this type of activities.

Questions:

1) What is the total amount that the company should pay in Option B?

Assuming Option B, the company is still thinking in making annual payments, at the end of the year with a growth of 0.25% yearly. The annual interest rate would still be the same 3.5%.

2)What is the difference of money between this action and what you calculated in 1)?

What is the present value of the difference?

Please add explanations to your answers