Your firm is considering purchasing an old office building with an estimated remaining service life of...

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 time 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 the operating expenses, including income taxes will be $85,000 for the first year and that they will increase by $5,000 each year after 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 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?

Expert Solution

Rahul Sunny answered 2 years ago

ABC Corporation wants to purchase an old office building with an estimated remaining service life of...

ABC Corporation wants to purchase an old office building with an estimated remaining service life of 25 years. Recently, the tenants signed long-term leases, which leads you to believe that the current rental income of $250,000 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. For example, the annual rental income would be $275,000 for years 6 through 10, $302,500...

Your firm is considering purchasing a machine that has an expected eight-year life and will generate...

Your firm is considering purchasing a machine that has an expected eight-year life and will generate for the firm $10,500 per year in net operating income before taxes. The firm has a 21% marginal tax. Given the associated project risks, the required return for this project is 14% p.a. The CFO has decided that the machine will be depreciated to its anticipated salvage value of $8,000. The machine costs $55,000. As the CEO you need to decide whether to purchase...

You are considering purchasing a small office building for $1,975,000 Your expectations include: First-year gross potential...

You are considering purchasing a small office building for $1,975,000 Your expectations include: First-year gross potential income of $340,000; Vacancy & collection losses equal to 15% of PGI; Operating expenses = 40% of EGI; Capital expenditures = 5% of EGI Mortgage (75% LTV) @ 7% What is debt amount? Mortgage will be amortized over 25 years with a monthly payment What is the monthly payment ? Can you teach me how to do this on excel? Thank you!

Your firm is considering leasing a $ 51000 copier. The copier has an estimated economic life...

Your firm is considering leasing a $ 51000 copier. The copier has an estimated economic life of eight years. Suppose the appropriate discount rate is 9.1 % APR with monthly compounding. Classify each lease below as a capital lease or operating lease, and explain why: a. A four-year fair market value lease with payments of $ 1145 per month. b. A six-year fair market value lease with payments of $ 800 per month. c. A five-year fair market value lease...

You are considering purchasing a small office building for$1,975,000Your expectations include:First-year gross potential...

You are considering purchasing a small office building for $1,975,000Your expectations include:First-year gross potential income of $340,000;Vacancy & collection losses equal to 15% of PGI;Operating expenses = 40% of EGI;Capital expenditures = 5% of EGIMortgage (75% LTV) @ 7%Debt amount = $1,481,250.00Mortgage will be amortized over 25 years with a monthly paymentMonthly payment = $10,469.17Total up-front financing costs = 2% of the loan amountWhat will be the Net loan proceeds to borrower?What is the required equity investment?

Alexander Industries is considering purchasing an insurance policy for its new office building in St. Louis,...

Alexander Industries is considering purchasing an insurance policy for its new office building in St. Louis, Missouri. The policy has an annual cost of $10,000. If Alexander Industries doesn’t purchase the insurance and minor fire damage occurs, a cost of $100,000 is anticipated; the cost if major or total destruction occurs is $200,000. The costs, including the state-of-nature probabilities, are as follows: Damage Decision Alternative None minor major s1 s 2 s 3 Purchase Insurance, d 1 10,000 10,000 10,000...

You are considering a hydraulic excavator. This machine will have an estimated service life of 10...

You are considering a hydraulic excavator. This machine will have an estimated service life of 10 years, with a salvage value of 10% of the investment cost. Its expected savings from annual operating and maintenance costs are estimated to be SR 70,000. To expect a 15% rate of return on investment, what would be the maximum amount that you are willing to pay for the machine: (Choose the closest answer) a) SR 498,145 b) SR 320,104 c) SR 250,417 d)...

Dinkins Inc. is considering disposing of a machine with a book value of $50,000 and an estimated remaining life of five years.

1) Dinkins Inc. is considering disposing of a machine with a book value of $50,000 and an estimated remaining life of five years. The old machine can be sold for $15,000. A new machine with a purchase price of $150,000 is being considered as a replacement. It will have a useful life of five years and no residual value. It is estimated that variable manufacturing costs will be reduced from $70,000 to $45,000 if the new machine is purchased....

Alexander Industries is considering purchasing an insurance policy for its new office building in St. Louis, Missouri.

Alexander Industries is considering purchasing an insurance policy for its new office building in St. Louis, Missouri. The policy has an annual cost of $10,000. If Alexander Industries doesn’t purchase the insurance and minor fire damage occurs, a cost of $100,000 is anticipated; the cost if major or total destruction occurs is $200,000. The costs, including the state-of-nature probabilities, are as follows:NoneMinorMajorDecision Alternatives1s2s3Purchase insurance, d110,00010,00010,000Do not purchase insurance, d20100,000200,000Probabilities0.960.030.01What lottery would you use to assess utilities? (Note: Because the data...

A company is considering the purchase of a 5-year old office building. After a careful review...

A company is considering the purchase of a 5-year old office building. After a careful review of the market and the leases that are in place, it believes that next year’s net operating income will be $100,000. It also believes that this cash flow will rise in the amount of $5,000 each year for the first 6 years after the first year, after which it is expected to grow by 4 percent per year in the foreseeable future. It plans...

Question