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, wi leads you to believe that the current rental income of $280,000 per year will remain constant for the first five years. Then the rental income will increase by 20% every five-year interval over the remaining life of the asset. That is, the annual rental income would be $336,000 for years 6 through 10, $403,200 for years 11 through 15, $483,840 for years 16 through 20, and $580,608 for years 21 through 25 You estimate that operating expenses, including income taxes, will be $77,000 for the first year and that they will increase by $4,000 each year thereafter You also estimate that razing the building and selling the lot on which it stanc will realize a net amount of $41,000 at the end of the 25-year period. If you had the opportunity to invest your money elsewhere and thereby earn interest at the r of 11% per annum, what would be the maximum amount you would be willing to pay for the building and lot at the present time?
