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 -

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