OUR FIRM IS CONSIDERING THE PURCHASE OF AN OLD OFFICE BUILDING WITH AN ESTIMATED REMAINING SERVICE LIFE OF 25 YEARS. THE TENANTS HAVE RECENTLY SIGNED LONG TERM LEASES, WHICH LEADS YOU TO BELIEVE THAT CURRENT RENTAL INCOME OF P150,000 PER YEAR WILL REMAIN CONSTANT FOR THE FIRST FIVE YEARS. THEN THE RENTAL INCOME WILL INCREASE BY 10% FOR EVERY FIVE YEARS INTERVAL OVER THE REMAINING ASSET LIFE. FOR EXAMPLE, THE ANNUAL RENTAL INCOME WOULD BE P165,000 FOR YEARS SIX THROUGH TEN, P181,500 FOR YEARS 11 THROUGH 15. P199,650 FOR YEARS 16 THROUGH 20, AND P 219, 615 FOR YEARS 21 THROUGH 25. YOU ESTIMATE THAT OPERATING EXPENSES, INCLUDING INCOME TAXES WILL BE P45,000 FOR THE FIRST YEAR AND THAT THEY WILL INCREASE BY P3,000 EACH YEAR THEREAFTER. YOU ESTIMATE THAT RAZING THE BUILDING AND SELLING THE LOT ON WHICH IT STANDS WILL REALIZE A NET AMOUNT OF P50,000 AT THE END OF THE 25 YEARS PERIOD. IF YOU HAD THE OPPORTUNITY TO INVEST YOUR MONEY ELSEWHERE AND THEREBY EARN INTEREST AT THE 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?
YOUR FIRM IS CONSIDERING THE PURCHASE OF AN OLD OFFICE BUILDING WITH AN ESTIMATED
REMAINING SERVICE LIFE OF 25 YEARS. THE TENANTS HAVE RECENTLY SIGNED LONG TERM
LEASES, WHICH LEADS YOU TO BELIEVE THAT CURRENT RENTAL INCOME OF P150,000 PER YEAR
WILL REMAIN CONSTANT FOR THE FIRST FIVE YEARS. THEN THE RENTAL INCOME WILL INCREASE
BY 10% FOR EVERY FIVE YEARS INTERVAL OVER THE REMAINING ASSET LIFE. FOR EXAMPLE, THE
ANNUAL RENTAL INCOME WOULD BE P165,000 FOR YEARS SIX THROUGH TEN, P181,500 FOR
YEARS 11 THROUGH 15. P199,650 FOR YEARS 16 THROUGH 20, AND P 219, 615 FOR YEARS 21
THROUGH 25. YOU ESTIMATE THAT OPERATING EXPENSES, INCLUDING INCOME TAXES WILL BE
P45,000 FOR THE FIRST YEAR AND THAT THEY WILL INCREASE BY P3,000 EACH YEAR
THEREAFTER. YOU ESTIMATE THAT RAZING THE BUILDING AND SELLING THE LOT ON WHICH IT
STANDS WILL REALIZE A NET AMOUNT OF P50,000 AT THE END OF THE 25 YEARS PERIOD. IF
YOU HAD THE OPPORTUNITY TO INVEST YOUR MONEY ELSEWHERE AND THEREBY EARN
INTEREST AT THE 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?
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