Question

Time Value Of Money Scenario, can be pictures of an excel file or otherwise! Thanks!

Time Value of Money Problems - You must decide whether to sell your building or rent it to one or more parties. The potential buyers are awaiting your response, so that the deal can be completed. Option 1: S900,000 in cash today. Option 2: 5700,000 in cash today, and $300,000 in the future. Payment 1 for $150,000 will be made in year 3 payment #2 for the remaining S150.000 will be made in in year 5. Option 3: A new tenant will lease the building immediately (without a lease) and will pay $175,000 in annual rent to you for the next 10 years. Option 4: You will subdivide the space. A new tenant will lease the building immediately (without a lease) and will pay $115.000 in annual rent for 10 years. In year 4. a second tenant will (without a lease) will being paying rent of $90,000 through year 10. In year 8, a third tenant (without a lease) will begin paying annual rent of $80.000 through year 10. The standard lease includes a clause to extend the lease for additional terms. Required Provide a value for Option 2-4. Clearly state which option you will accept and thoroughly explain why you have chosen that option. In making your selection, explain why or why not you selected one over the other options. You should provide a separate document showing all of your work (this can be in Excel). If you use Excel please provide commentary on what you are doing with the formulas. The company has determined a 10% Cost of Capital

Answer 1

Let us find the present values of all the options for comparison.

Assumptions:

1. All the payments are received at the end of the year
2. Receipts of all the payments is certain.

Option 1 : $900,000

Option 2 : $905,834.50

Present Value = $700,000 + ($150,000 * discounting factor of 10% at 3 years) + ($150,000 * discounting factor of 10% at 5 years)

Present Value = $700,000 + ($150,000 * 0.75131) + ($150,000 * 0.62092)

Present Value = $700,000 + $112,696.50 + $93,138

Present Value = $905,834.50

Option 3 : $1,075,299.75

Present Value = Annual Lease rentals * Annuity factor of 10% for 10 years

= $175,000 * 6.14457

= $1,075,299.75

Option 4 : $1,137,911.44 (be careful with amounts in picture)

Now as we have computed the present value of all the 4 options, we will choose Option 4 among all the options because it has a higher present value as compared to the other options. It will provide the maximum value of $1,137,911.44 which is much higher than all other options.

Option 4 Year 1 2 4 5 6 7 8 9 10 Tenant 1 Tenant 2 Tenant 3 Total rent receipts PV Factor Present Value (=B4+C4+D4) (=[1/1.1]raised to power A4) (=E4* F4) $ 1,15,000.00 $ - $ - $ 1,15,000.00 0.909090909 $ 1,04,545.45 $ 1,15,000.00 $ $ 1,15,000.00 0.826446281 $ 95,041.32 $ 1,15,000.00 $ - $ 1,15,000.00 0.751314801 $ 86,401.20 $ 1,15,000.00 $ 90,000.00 $ $ 2,05,000.00 0.683013455 $ 1,40,017.76 $ 1,15,000.00 $ 90,000.00 $ $ 2,05,000.00 0.620921323 $ 1,27,288.87 $ 1,15,000.00 $ 90,000.00 $ $ 2,05,000.00 0.56447393 $ 1,15,717.16 $ 1,15,000.00 $ 90,000.00 $ - $ 2,05,000.00 0.513158118 $ 1,05,197.41 | $ 1,15,000.00 $ 90,000.00 $ 80,000.00 $ 2,85,000.00 0.46650738 $ 1,32,954.60 $ 1,15,000.00 $ 90,000.00 $ 80,000.00 $ 2,85,000.00 0.424097618 $ 1,20,867.82 $ 1,15,000.00 $ 90,000.00 $ 80,000.00 $ 2,85,000.00 0.385543289 $ 1,09,879.84 Present Value of Option 4 $ 11,37,911.44