A vacant building is offered for sale. You're considering renovating it, so it will generate $94,000...

 

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A vacant building is offered for sale. You're considering renovating it, so it will generate $94,000 in rent each year, starting in year 2. The renovation is estimated to cost $783,000 and last two years. The entire cost of renovation is due at the outset. Once the building is renovated, the rent will increase by 2% annually for the foreseeable future. The appropriate discount rate is 9%. Calculate the maximum price you will be willing to pay for the vacant building. HINT: This price should be the net present value (NPV) of the project, i.e., the present value of the renovated building minus the upfront renovation cost. NOTE: This number could be positive or negative. (Negative = You will not be willing to purchase it; it has a negative NPV.) A vacant building is offered for sale. You're considering renovating it, so it will generate $94,000 in rent each year, starting in year 2. The renovation is estimated to cost $783,000 and last two years. The entire cost of renovation is due at the outset. Once the building is renovated, the rent will increase by 2% annually for the foreseeable future. The appropriate discount rate is 9%. Calculate the maximum price you will be willing to pay for the vacant building. HINT: This price should be the net present value (NPV) of the project, i.e., the present value of the renovated building minus the upfront renovation cost. NOTE: This number could be positive or negative. (Negative = You will not be willing to purchase it; it has a negative NPV.)

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