Old office building with estimated remaining service life

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Reference no: EM131088808

Your firm is considering purchasing an old office building with an estimated remaining service life of 25 years. Recently, the tenants signed long-term lease, which leads you to believe that the current rental income of $210,000 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. that is, the annual rental income would be 231,000 for year 6 through 10, 254,100 for years 11 through 15, 279,510 for years 16 through 20, and 307,461 for years 21 through 25. You estimate the operating expenses, including taxes, will be $80,000 for the first year and that they will increase by $2000 each year thereafter. You also estimate that razing the building and selling the lot on which stands will realize a net amount of $51,000 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 9% per annum, what would be the maximum amount you would be willing to pay for the building and lot at the present time?

Reference no: EM131088808

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