ABC Ltd. is a multinational that wants to invest in the real estate business in Barcelona. Two
Question:
ABC Ltd. is a multinational that wants to invest in the real estate business in Barcelona. Two alternatives are offered by the owner of a property in one of the most popular areas of the city.
Option A: Renting the property with a perpetual contract, meaning for ever and ever. In this case, the company has to pay 4,000 € per month and the contract contains a clause stating that the rent price will be growing at a 0.07% monthly.
Option B: Acquiring the property with a mortgage scheme for 40 years. The current ownership is demanding an initial payment of 1,975,000 € and a monthly amount of 2,500 €.
The interest applicable rates are around 3.5% compounded yearly, this is supposed to be the market rate for this type of activities.
1) In terms of Finance, what is the difference between Option A and Option B? (10 points)
2) What is the total amount that the company should pay in Option A? (30 points)
3) What is the total amount that the company should pay in Option B? (30 points)
4) Assuming Option B, the company is still thinking in making annual payments, at the end of the year with a growth of 0.25% yearly. The annual interest rate would still be the same 3.5%. What is the difference of money between this action and what you calculated in 3)? What is the present value of the difference? (30 points)
Management Accounting
ISBN: 9780730369387
4th Edition
Authors: Leslie G. Eldenburg, Albie Brooks, Judy Oliver, Gillian Vesty, Rodney Dormer, Vijaya Murthy, Nick Pawsey