What is the maximum lease price you would be willing to pay

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Question: You want to lease some space in an office building for 15 years with lease payments due at the start of each year. The market price for the space you need is $15,000,000 and you estimate maintenance cost to be $250,000 per year, which, if you lease, you would not have to cover. In 15 years, you believe the market value of the space will likely remain at $15,000,000. Assume that the after-tax opportunity cost of funds is 7% and your marginal tax rate is 35%. Assume also that real estate investment cannot be depreciated.

a. What is the maximum lease price you would be willing to pay per year?

How will your answer be different if you assume that the lease payments musts be made each month at the beginning of the month?

 

Reference no: EM133331754

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