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 $250,000 per year will remain constant for the first five years. Then the rental income will increase by 10% for every five-year interval over the remaining life of the asset. That is, the annual rental income would be $275,000 for years 6 through 10, $302,500 for years 11 through 15, $332,750 for years 16 through 20, and $366,025 for years 21 through 25. You estimate that operating expenses, including income taxes, will be $85,000 for the first year and that they will increase by $5,000 each year thereafter. You also estimate that razing the building and selling the lot on which it stands will realize 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, what would be the maximum amount you would be willing to pay for the building and lot at the present time? Annual Interest Rate 12% Complete the steps below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you need. To copy/paste a formula across a row or down a column, an absolute cell reference or a mixed cell reference may be preferred. If a specific Excel function is to be used, the directions will specify the use of that function. Do not type in numerical data into a cell or function. Instead, make a reference to the cell in which the data is found. Make your computations only in the blue cells highlighted below. In all cases, unless otherwise directed, use the earliest appearance of the data in your formulas, usually the Given Data section. n Capital Investment $0 101234567∞ad Rental O&M Cash Flow Project Balance $0 $250,000 -$85,000 $165,000 $165,000 $250,000 -$90,000 $160,000 $344,800 $250,000 -$95,000 $155,000 $541,176 $250,000 -$100,000 $150,000 $756,117 $250,000 -$105,000 $145,000 $991,851 $275,000 -$110,000 $165.000 $1,275,873 $275,000 -$115,000 $160.000 $1,588,978 8 $275,000 -$120,000 $155,000 $1,934,655 9 $275,000 -$125,000 $150,000 $2,316,814 $275,000 -$130,000 $145,000 $2,739,832

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 $250,000 per year will remain constant for the first five years. Then the rental income will increase by 10% for every five-year interval over the remaining life of the asset. That is, the annual rental income would be $275,000 for years 6 through 10, $302,500 for years 11 through 15, $332,750 for years 16 through 20, and $366,025 for years 21 through 25. You estimate that operating expenses, including income taxes, will be $85,000 for the first year and that they will increase by $5,000 each year thereafter. You also estimate that razing the building and selling the lot on which it stands will realize 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, what would be the maximum amount you would be willing to pay for the building and lot at the present time? Annual Interest Rate 12% Complete the steps below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you need. To copy/paste a formula across a row or down a column, an absolute cell reference or a mixed cell reference may be preferred. If a specific Excel function is to be used, the directions will specify the use of that function. Do not type in numerical data into a cell or function. Instead, make a reference to the cell in which the data is found. Make your computations only in the blue cells highlighted below. In all cases, unless otherwise directed, use the earliest appearance of the data in your formulas, usually the Given Data section. n Capital Investment $0 101234567∞ad Rental O&M Cash Flow Project Balance $0 $250,000 -$85,000 $165,000 $165,000 $250,000 -$90,000 $160,000 $344,800 $250,000 -$95,000 $155,000 $541,176 $250,000 -$100,000 $150,000 $756,117 $250,000 -$105,000 $145,000 $991,851 $275,000 -$110,000 $165.000 $1,275,873 $275,000 -$115,000 $160.000 $1,588,978 8 $275,000 -$120,000 $155,000 $1,934,655 9 $275,000 -$125,000 $150,000 $2,316,814 $275,000 -$130,000 $145,000 $2,739,832

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 1P

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