Professional Properties is considering remodeling the office building it leases to Heartland Insurance. The remodeling costs are estimated at $3.4 million. If the building is remodeled, Heartland Insurance has agreed to pay an additional $820,000 a year in rent for the next 5 years. The discount rate is 15 percent. What is the benefit of the remodeling project to Professional Properties?
Answers
Answer:
- $651,234.54
Explanation:
Data provided in the question:
Cost of remodeling = $3.4 million = $3,400,000
Rent paid each year = $820,000
Duration, n = 5 years
Discount rate, r = 15% = 0.15
Now,
Present value of the amount rent paid each year = A ×
Here,
A = Rent paid each year
Thus,
Present value of the amount rent paid each year
= $820,000 ×
= $820,000 × 3.352153
= $2,748,765.46
Therefore,
Benefit = Present value of the amount rent paid - Cost of remodeling
= $2,748,765.46 - $3,400,000
= - $651,234.54
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Please check attachment for complete solution and step by step explanation
Final answer:
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