Your firm plans on purchasing an existing rental property with a remaining service life of 30 years. Recently, the tenants signed a 5-year lease, fixing the rental income at $300,000 for the next five years. Rental income is expected to increase by 5% every five years over the remaining life of the property. Based on this increase, the annual rental income would be $315,000 for years 6 through 10, $330,750 for years 11 through 15, $347,288 for years 16 through 20, $364,652 for years 21 through 25, and $382,884 for years 26 through 30. Operating expenses, including income taxes, are estimated be $70,000 for the first year increasing by $6,000 each year thereafter. At the end of the property service life, you expect selling the lot on which it stands for net amount of $550,000. Alternatively, you could invest in a mutual fund that earns at the rate of 10% per annum, what would be the maximum amount you would be willing to pay for the property at the present time?

Your firm plans on purchasing an existing rental property with a remaining service life of 30 years. Recently, the tenants signed a 5-year lease, fixing the rental income at $300,000 for the next five years. Rental income is expected to increase by 5% every five years over the remaining life of the property. Based on this increase, the annual rental income would be $315,000 for years 6 through 10, $330,750 for years 11 through 15, $347,288 for years 16 through 20, $364,652 for years 21 through 25, and $382,884 for years 26 through 30. Operating expenses, including income taxes, are estimated be $70,000 for the first year increasing by $6,000 each year thereafter. At the end of the property service life, you expect selling the lot on which it stands for net amount of $550,000. Alternatively, you could invest in a mutual fund that earns at the rate of 10% per annum, what would be the maximum amount you would be willing to pay for the property at the present time?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 2P

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