Old office building with an estimated remaining service life

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Reference no: EM131308261

Your firm is considering purchasing an old office building with an estimated remaining service life of 25 years. Recently, the tenants signed long-term leases with fixed rental rates for the first 5 years; thus, the current rental income of $150,000 per year will remain constant for the first 5 years. Then the rental income will increase by 10% for every 5-year interval over the remaining life of the asset. Therefore, the annual rental income would be $165,000 for years 6 through 10, $181, 500 for years 11 through 15, $199, 650 for years 16 through 20, and $219, 615 for years 21 through 25. You estimate that annual operating expenses, including income taxes, will be $45,000 for the first year and that they will increase by $3,000 each year thereafter. You also estimate that razing the building and selling the lot on which it stands will yield 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 compounded annually, what would be the maximum amount (i.e., present worth) you would be willing to pay for the building and lot at the present time?

Reference no: EM131308261

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