7) (35 points) EmKay LLC purchases a new office building for $500,000 and plans

Question

7) (35 points) EmKay LLC purchases a new office building for $500,000 and plans to keep it for 10 years. At the end of the 10-year period it is estimated that the market value of the office building will be $600,000 Building operation and maintenance (O&M;) costs are estimated to be S50,000 for the first year. Thereafter, these O&M; costs are expected to increase by 10% over the previous year's costs. If Emkay LLC's TVOM is 10% per year compounded annually, what is the equivalent uniform annual rent that must be generated by this real-estate investment, in order to break-even? 00 the previous year's cost tat must be generated by this

Explanation / Answer

Year Cash flows PVF @ 10% Present Value 0 -500000 1 -500000 1 -50000 0.909091 -45454.5 2 -55000 0.826446 -45454.5 3 -60500 0.751315 -45454.5 4 -66550 0.683013 -45454.5 5 -73205 0.620921 -45454.5 6 -80525.5 0.564474 -45454.5 7 -88578.1 0.513158 -45454.5 8 -97435.9 0.466507 -45454.5 9 -107179 0.424098 -45454.5 10 482102.6 0.385543 185871.4 Present worth -723219 Divide: Annuity factor for 10 yrs 6.1446 Equivalent Annual cost -117700 In order to Break even, building must earn annual rent of $ 117,700 i.e. equal to Equivalent annual cost

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