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Question
home / study / business / finance / questions and answers / you are considering the purchase of a parking deck ... Question You are considering the purchase of a parking deck close to your office building. The parking deck is a 15-year old structure with an estimated remaining service life of 25 years. The tenants have recently signed long-term leases, which leads you to believe that the current rental income of $250,000 per year will remain constant for the first five years. Then the rental income will increase by 10% for every five-years interval over the remaining asset life. Thus the annual rental income would be $275,000 for years 6 through 10, $366025 for years 21 through 25. You estimate that operating expenses, including income taxes, will be $65,000 for the first year and that they will increase by $6,000 each year thereafter. You estimate that $200,000 at the end of the 25-year period. If you had the opportunity to invest your money elsewhere and thereby earn interest at the rate of 15% per annum, what would be the maximum amount you would be willing to pay for the parking deck and lot at the present time?
Explanation / Answer
We need to compute pv of each cash flow:
Year
Rental
Operating expenses
Cash flow
PV factor 15%
PV
1
250000
65000
185000
0.869565
160869.5652
2
250000
71000
179000
0.756144
135349.7164
3
250000
77000
173000
0.657516
113750.3082
4
250000
83000
167000
0.571753
95482.79201
5
250000
89000
161000
0.497177
80045.45438
6
275000
95000
180000
0.432328
77818.96726
7
275000
101000
174000
0.375937
65413.04495
8
275000
107000
168000
0.326902
54919.49801
9
275000
113000
162000
0.284262
46050.51075
10
275000
119000
156000
0.247185
38560.81416
11
302500
125000
177500
0.214943
38152.42203
12
302500
131000
171500
0.186907
32054.57626
13
302500
137000
165500
0.162528
26898.37683
14
302500
143000
159500
0.141329
22541.92095
15
302500
149000
153500
0.122894
18864.30348
16
332750
155000
177750
0.106865
18995.21282
17
332750
161000
171750
0.092926
15960.02105
18
332750
167000
165750
0.080805
13393.44846
19
332750
173000
159750
0.070265
11224.88499
20
332750
179000
153750
0.0611
9394.167887
21
366025
185000
181025
0.053131
9617.980865
22
366025
191000
175025
0.046201
8086.258088
23
366025
197000
169025
0.040174
6790.482221
24
366025
203000
163025
0.034934
5695.161452
25
366025
209000
157025
0.030378
4770.048483
25
200000
200000
0.030378
6075.527442
total
$1,116,775.46
Hence, the price of parking deck would be $1,116,775.46.
Year
Rental
Operating expenses
Cash flow
PV factor 15%
PV
1
250000
65000
185000
0.869565
160869.5652
2
250000
71000
179000
0.756144
135349.7164
3
250000
77000
173000
0.657516
113750.3082
4
250000
83000
167000
0.571753
95482.79201
5
250000
89000
161000
0.497177
80045.45438
6
275000
95000
180000
0.432328
77818.96726
7
275000
101000
174000
0.375937
65413.04495
8
275000
107000
168000
0.326902
54919.49801
9
275000
113000
162000
0.284262
46050.51075
10
275000
119000
156000
0.247185
38560.81416
11
302500
125000
177500
0.214943
38152.42203
12
302500
131000
171500
0.186907
32054.57626
13
302500
137000
165500
0.162528
26898.37683
14
302500
143000
159500
0.141329
22541.92095
15
302500
149000
153500
0.122894
18864.30348
16
332750
155000
177750
0.106865
18995.21282
17
332750
161000
171750
0.092926
15960.02105
18
332750
167000
165750
0.080805
13393.44846
19
332750
173000
159750
0.070265
11224.88499
20
332750
179000
153750
0.0611
9394.167887
21
366025
185000
181025
0.053131
9617.980865
22
366025
191000
175025
0.046201
8086.258088
23
366025
197000
169025
0.040174
6790.482221
24
366025
203000
163025
0.034934
5695.161452
25
366025
209000
157025
0.030378
4770.048483
25
200000
200000
0.030378
6075.527442
total
$1,116,775.46
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