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Your firm is considering purchasing an old office building with an estimated remaining service life of 25 years. Recently, the tenants signed a longterm lease,
Your firm is considering purchasing an old office building with an estimated remaining service life of 25 years. Recently, the tenants signed a longterm 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 1 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,$332,750 for years 16 through 20 , and $366,025 for years 21 through 25 . You estimate that operating expenses, including income taxes, will be $85,000 for the first year and that they will increase by $5,000 each year thereafter. You also estimate that razing the building and selling the lot on which it stands will realize a net amount of $50,000 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 12% per annum, what would be the maximum amount you would be willing to pay for the building and lot at the present time
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