Reference no: EM131734162

Question: (Annual payments at the beginnings of the years). You expect the first lease will be signed one year from now, with the first rent payment to be received at that time. The second lease will begin 10 years after that, the third 10 years later, and so on. The rent in each lease is constant, but between new lease signings the rent is expected to grow at a rate of 1% per year. The rent on the first lease is expected to be $15/SF per year. To compute the present value of each lease as of the time of its signing, use a low discount rate of 6% per year, reflecting the fact that the cash flows under the lease are contractually fixed. However, prior to the signing of each lease, the amount of the rent for that lease is uncertain and risky, so a 10% rate is appropriate for discounting lease values back to present value prior to lease signings. Use the level annuity formula embedded in a constant-growth perpetuity formula to compute the present value of this 250,000-SF space.