Two parcels of land are being considered for a new office building. Both sites c

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 $15,000 per year. This tax is expected to increase by $500 per year starting at EOY 2. The other site, in City B, has a property tax of $11,000 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. Click the icon to view the interest and annuity table for discrete compounding when i= 10% per year. Money set aside for the parcel in City A, PWA (Round to the nearest dollar.)

Explanation / Answer

PW for both cities is computed as follows.

CITY - A Year Cost ($) PV Factor @10% Discounted Cost ($) (A) (B) (A) x (B) 0 15,000 1.0000 15,000 1 15,000 0.9091 13,636 2 15,500 0.8264 12,810 3 16,000 0.7513 12,021 4 16,500 0.6830 11,270 5 17,000 0.6209 10,556 6 17,500 0.5645 9,878 7 18,000 0.5132 9,237 8 18,500 0.4665 8,630 9 19,000 0.4241 8,058 10 19,500 0.3855 7,518 PWA ($) = 1,18,614 CITY - B Year Cost ($) PV Factor @10% Discounted Cost ($) (A) (B) (A) x (B) 0 11,000 1.0000 11,000 1 11,000 0.9091 10,000 2 13,000 0.8264 10,744 3 15,000 0.7513 11,270 4 17,000 0.6830 11,611 5 19,000 0.6209 11,798 6 21,000 0.5645 11,854 7 23,000 0.5132 11,803 8 25,000 0.4665 11,663 9 27,000 0.4241 11,451 10 29,000 0.3855 11,181 PWB ($) = 1,24,373

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