Your company is negotiating to acquire a new head office building listed for $25 million. The owner has proposed the following payment plan for the next 20 years:
• There would be a 20% down payment and annual payments for the next 10 years of $1.8 million, starting one year from now.
• For Years 11 through 15, the annual payments balloon to $3 million.
• For Years 16 through 20, the annual payments would decline to $400,000.
Required:
(a) Should your company accept this offer if the interest rate is 6% for real estate?
(b) Determine the breakeven interest rate for the given payment plan, assuming that the fair value of the building is equal to its list price.