An investor is considering purchasing an office building for $5 million with the intention of renting it out. Six months after purchase the investor will spend $0.5 million on necessary refurbishments and improvements. A tenant has agreed to lease the building in one year's time for 20 years. The tenant will pay an initial rent of $0.75 million per annum payable monthly in advance. The rent will be increased at four-yearly intervals at a rate of 2.0% per annum compound. It has further been agreed that at the end of the lease period the tenant will buy the building from the investor for $10 million. Which of the following is the accumulated profit the investor will have made at the end of the term using a rate of return on its investment of 6.0% per annum effective?

An investor is considering purchasing an office building for $5 million with the intention of renting it out. Six months after purchase the investor will spend $0.5 million on necessary refurbishments and improvements. A tenant has agreed to lease the building in one year's time for 20 years. The tenant will pay an initial rent of $0.75 million per annum payable monthly in advance. The rent will be increased at four-yearly intervals at a rate of 2.0% per annum compound. It has further been agreed that at the end of the lease period the tenant will buy the building from the investor for $10 million. Which of the following is the accumulated profit the investor will have made at the end of the term using a rate of return on its investment of 6.0% per annum effective?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 7MC: Using the information provided, what transaction represents the best application of the present...

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Concept explainers

Mortgages

A mortgage is a formal agreement in which a bank or other financial institution lends cash at interest in return for assuming the title to the debtor's property, on the condition that the obligation is paid in full.

Mortgage

The term "mortgage" is a type of loan that a borrower takes to maintain his house or any form of assets and he agrees to return the amount in a particular period of time to the lender usually in a series of regular equally monthly, quarterly, or half-yearly payments.

Question

An investor is considering purchasing an office building for $5 million with the intention of renting it out. Six months after purchase the
investor will spend $0.5 million on necessary refurbishments and improvements.
A tenant has agreed to lease the building in one year's time for 20 years. The tenant will pay an initial rent of $0.75 million per annum
payable monthly in advance. The rent will be increased at four-yearly intervals at a rate of 2.0% per annum compound. It has further
been agreed that at the end of the lease period the tenant will buy the building from the investor for $10 million.
Which of the following is the accumulated profit the investor will have made at the end of the term using a rate of return on its
investment of 6.0% per annum effective?
O $22,889,114.62
O $23,120,505.81
O $23,180,097.78
O $23,275,395.38
O $23,413,623.89
O $23,430,787.98
O $23,569,942.54
O $23,586,683.6
O $23,726,768.86
O $23,785,620.07

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