You are considering the purchase of another office building close to your existing office building The building is a 10-year old structure with an ostimated remaining service life of 20 years. The tenants have recently signed long-term leases, which leads you to believe that the current rental income of $180,000 per year will remain constant for the first five years, Then the rental income will increase by 20% for every five-year interval over the remaining asset life. Thus, the annual rental income would be $216,000 for years 6 through 10, $259,200 for years 11 through 15, and $311,040 for yoars 16 through 20. You estimate that operating expenses will be $35,000 for the first year and that they will increase by $8,000 each year thereafter. You estimate that completely destroying the building and selling the lot on which it stands will realize a net amount of $200,000 at the end of the 20th year. If you had the opportunity to invest your money elsewhere and thereby earn interest at the rate of 10% per year, what would be the maximum amount (approximately) you would be willing to pay for the building at the present time? A $1,765,417 OB $1,029,239 OC $1,140,291 OD $850,000

You are considering the purchase of another office building close to your existing office building The building is a 10-year old structure with an ostimated remaining service life of 20 years. The tenants have recently signed long-term leases, which leads you to believe that the current rental income of $180,000 per year will remain constant for the first five years, Then the rental income will increase by 20% for every five-year interval over the remaining asset life. Thus, the annual rental income would be $216,000 for years 6 through 10, $259,200 for years 11 through 15, and $311,040 for yoars 16 through 20. You estimate that operating expenses will be $35,000 for the first year and that they will increase by $8,000 each year thereafter. You estimate that completely destroying the building and selling the lot on which it stands will realize a net amount of $200,000 at the end of the 20th year. If you had the opportunity to invest your money elsewhere and thereby earn interest at the rate of 10% per year, what would be the maximum amount (approximately) you would be willing to pay for the building at the present time? A $1,765,417 OB $1,029,239 OC $1,140,291 OD $850,000

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Cash Flow in Engineering Economics (Interest and Equivalence)

The cash flows of a firm are of two categories such as cash inflows and cash outflows. Cash inflow is the money or income entering a firm during a specific period whereas cash outflow is the money exiting a firm during a specific period in the form of the expenses incurred by the firm. In other words, we can say that cash flow is a series of expenses and credits that run over the project over the lifetime it existed whereas cash inflows are all the income and gains the company earns as a result of its operations.

Question

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You are considering the purchase of another office building close to your existing office building The building is a 10-year old
structure with an ostimated remaining service life of 20 years. The tenants have recently signed long-term leases, which leads
you to believe that the current rental income of $180,000 per year will remain constant for the first five years. Then the rental
income will increase by 20% for every five-year interval over the remaining asset life. Thus, the annual rental income would be
$216,000 for years 6 through 10, $259,200 for years 11 through 15, and $311,040 for yoars 16 through 20. You estimate that
operating expenses will be $35,000 for the first year and that they will increase by $8,000 each year thereafter. You estimate that
completely destroying the building and selling the lot on which it stands will realize a net amount of $200,000 at the end of the
20th year. If you had the opportunity to invest your money elsewhere and thereby earn interest at the rate of 10% per year, what
would be the maximum amount (approximately) you would be willing to pay for the building at the present time?
A $1,765,417
OB $1,029,239
OC $1,140,291
OD $850,000

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