Question

You have the opportunity to purchase an office building for $600,000 with an expected life of...

You have the opportunity to purchase an office building for $600,000 with an expected life of 20 years. Looking over the financial details, you see that the before-tax net rental income is $90,000. If you want a return of at least 15%, how much should you pay for the building?

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Answer #1
Using present value of annuity formula , we can find out the amount that you should pay for the building.
Present value of annuity = P x {[1 - (1+r)^-n]/r}
Present value of annuity = the amount that you should pay for the building = ?
P = Annual net rental income = $90000
r = rate of return per year = 15%
n = expected life of building = 20 years
Present value of annuity = 90000 x {[1 - (1+0.15)^-20]/0.15}
Present value of annuity = 90000 x 6.259331
Present value of annuity = 563339.83
You should pay $5,63,340 for the building.
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