1. 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?

1. 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?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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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?
A store has 5 years remaining on its lease in a mall. Rent is $2,100 per month, 60 payments remain, and the next payment is due in 1 month. The mall's owner plans to sell the property in a year and wants rent at that time to be high so that the property will appear more valuable. Therefore, the store has been offered a "great deal" (owner's words) on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2,600 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month). If the store owner decided to bargain with the mall's owner over the new lease payment, what new lease payment would make the store owner indifferent between the new and old leases? (Hint: Find FV of the old lease's original cost at t = 9; then treat this as the PV of a 51-period annuity whose payments represent the rent during months 10 to 60.) Do not round intermediate calculations. Round your answer to the nearest cent. The store owner is…
A store has 5 years remaining on its lease in a mall. Rent is $2,000 per month, 60 payments remain, and the next payment is due in 1 month. The mall's owner plans to sell the property in a year and wants rent at that time to be high so that the property will appear more valuable. Therefore, the store has been offered a "great deal" (owner's words) on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2,750 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month). a. Should the new lease be accepted? (Hint: Be sure to use 1% per month.) No b. If the store owner decided to bargain with the mall's owner over the new lease payment, what new lease payment would make the store owner indifferent between the new and old leases? (Hint: Find FV of the old lease's original cost at t = 9; then treat this as the PV of a 51-period annuity whose payments represent the rent during months 10 to 60.) Do not round…
The Taylors have purchased a $260,000 house. They made an initial down payment of $30,000 and secured a mortgage with interest charged at the rate of 8%/ year on the unpaid balance. Interest computations are made at the end of each month. If the loan is to be amortized over 30 years, what monthly payment will the Taylors be required to make? (Round your answer to the nearest cent.)$ What is their equity (disregarding appreciation) after 5 years? After 10 years? After 20 years? (Round your answers to the nearest cent.) 5 years $ 10 years $ 20 years $
9
A landlord is evaluating his investment in a new residential apartment building. According to his evaluation, internal rate of return on this investment is 8% if (i) annual rent is $70,000 for 10 years and (ii) resale value of the building is 6% of the initial value at the end of the 10th year. What is the purchase price of the building? (Do not use the $ sign and round your answer to the nearest $ value)
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…
An owner of the ATRIUM Tower Office Building is currently negotiating a five-year lease with ACME Consolidated Corporation for 20,000 rentable square feet of office space. ACME would like a base rent of $11 per square foot (PSF) with step-ups of $1 per year beginning one year from now. Required: a. What is the present value of cash flows to ATRIUM under the above lease terms? (Assume a 10% discount rate.) b. The owner of ATRIUM believes that base rent of $11 PSF in (a) is too low and wants to raise that amount to $15 with the same $1 step-ups. However, now ATRIUM would provide ACME a $53,000 moving allowance and $130,000 in tenant improvements (Tls). What would be the present value of this alternative to ATRIUM? c. ACME informs ATRIUM that it is willing to consider a $14 PSF with the $1 annual stepups. However, under this proposal, ACME would require ATRIUM to buyout the one year remaining on its existing lease in another building. That lease is $6 PSF for 20,000 SF per year. If ATRIUM…
A store has 5 years remaining on its lease in a mall. Rent is $2,100 per month, 60 payments remain, and the next payment is due in 1 month. The mall's owner plans to sell the property in a year and wants rent at that time to be high so that the property will appear more valuable. Therefore, the store has been offered a "great deal" (owner's words) on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2,500 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month). a. Should the new lease be accepted? (Hint: Be sure to use 1% per month.) -Select- ✓ b. If the store owner decided to bargain with the mall's owner over the new lease payment, what new lease payment would make the store owner indifferent between the new and old leases? (Hint: Find FV of the old lease's original cost at t = 9; then treat this as the PV of a 51-period annuity whose payments represent the rent during months 10 to 60.) Do not round…
Sandra has just signed a 7-year lease for her new business. The full annual lease amount is due at the beginning of every year and such cash flows have been agreed to be 25,918 dollars now and the subsequent payments to increase by 4% per year until maturity. Given that the prevailing average market interest rate is 8% per year compounded monthly, compute the present value of this financial asset. (note: round your answer to the nearest cent and do not include spaces, currency signs, or commas) Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
A user has an option to renew a lease on 10,000 square feet at a rate of $8 per square foot for five years. The current market rate is $10 per square foot. What is the value of the user's leasehold interest at 10 percent?
Kim Inc. must install a new air-conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly profitable plant would have to shut down. Two units are available, HCC and LCC (for high and low capital costs, respectively). HCC has a high capital cost but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it uses more electricity. The costs of the units are shown here. Kim's WACC is 6%. HCC LCC 0 -Select- 1 -$50,000 -$50,000 -$610,000 -$50,000 -$90,000 -$175,000 -$175,000 -$175,000 2 -Select- 3 -Select- ✓ 4 -$50,000 -$175,000 a. Which unit would you recommend? I. Since all of the cash flows are negative, the IRR's will be negative and we do not accept any project that has a negative IRR. II. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed. III. Since all of the cash flows are negative, the NPV's will be negative and we do not…

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