Question

(5) You are considering buying an office building. You estimate that you will receive $1,100 at the end of every month for 20 years as rent (triple net). You want to earn a 10% rate of return per year. (a) First assume building has no value at the end of 20 years). How much would you be willing to pay for the building; i.e. what is the worth today of the net rent to be received in the future? (b) In addition to the monthly rent, now assume the building will be worth $200,000 in twenty years. How much would you be willing to pay for the building today? Note: RATE in Excel is the monthly interest rate, which can be found by dividing the annual interest rate by 12: so we are all on the same pape, do not round up that number, but used that embedded cell at the RATE

Answer 1

a)PMT =1100
Number of Periods =20*12 =240
Rate per month =10%/12
Amount Willing to pay today =PMT*((1-(1+r)^-n)/r =1100*((1-(1+10%/12)^-240)/(10%/12)) =113987.08

b. If FV is 200000 20 years from today
Amount willing to pay today =PMT*((1-(1+r)^-n)/r+FV/(1+r)^n =1100*((1-(1+10%/12)^-240)/(10%/12))+200000/(1+10%/12)^240 =141279.38