Old office building with an estimated remaining service life

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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 long-term lease, which leads you to believe that the current rental income of $300,000 per year will remain constant for the first five years. Then the rental income will increase by 20% for every five-year interval over the remaining life of the asset. That is, the annual rental income would be $360,000 for years 6 through 10, $432,000 for years 11 through 15, $518,400 for years 16 through 20, and $622080 for years 21 through 25. You estimate that operating expenses, including income taxes, will be $80,000 for the first year and that they will increase by $4,000 each year thereafter. You also estimate that razing the building and selling the lot on which is stands will realize a net amount of $48,000 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 11% per annum, what would be the max amount you would be willing to pay for the building and lot at te present time?

Reference no: EM13896055

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