Question

You have just inherited an office building. You expect the annual rental income (net of maintenance and other cost) for the building to be $100,000 for the next year and to increase at 5% per year indefinitely. An expanding internet company offers to rent the building at a fixed annual rent for 5 years. After year 5, you could re-negotiate or rent the building to another tenant. What is the minimum acceptable fixed rental payments for this five-year agreement? Use an annual discount rate of 12% and assume the rent payments are paid at the beginning of the year, so the first rent payment is made at year 0.

Answer 1

First we find the PV of the present rent agreement which is

441285.71

Fixed rental payments per annum

$109,300.85

WORKINGS

Year	Rent
0	100000
1	105000
2	110250
3	115762.50
4	121550.63
5
NPV	441285.71
Fixed rental payments per annum	$109,300.85