Question

Two parcels of land are being considered for a new office building. Both sites cost the same amount but differ mainly in their annual property tax assessments. The parcel in City A has a current property tax of ​$15000 per year. This tax is expected to increase by ​$400 per year starting at EOY 2. The other​ site, in City​ B, has a property tax of ​$12000 per year with an anticipated increase of ​$2,000 per year starting at EOY 2. How much money would have to be set aside today​ (use the PW​ method) for each site to provide for property taxes spanning the next 10​ years? The interest rate is 10​% per year.

Money set aside for the parcel in City​ A, PWA=

Money set aside for the parcel in City​ B, PWB=​

Answer 1

For city A, we convert the cashflows series into a level annual payments of $14600 for 10 years and an increasing annuity of $400 starting in Year 1 for 10 years.

For city A, we convert the cashflows series into a level annual payments of $10000 for 10 years and an increasing annuity of $2000 starting in Year 1 for 10 years.

We find the Present Worth as follows using the present value of a level annuity and increasing annuity standard formulae -