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    Purchase of an Office Building

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    You are contemplating the purchase of an office building. Next year net rental income will be $400,000, which will grow at 4% per year. You believe that in 10 years the office building could be sold for $7.4 million. The appropriate discount rate for investments of this type is 12%. What is the most you should be willing to pay for the office building today?

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    Solution Preview

    This is a question of present value
    We can input
    Annual rental income D = 400,000
    growth rate g = 4%
    Future value FV = 7,400,000
    Number of years N = 10
    discount rate R = 12%

    We can then compute the cash inflow of each year
    For year 1 - ...

    Solution Summary

    The solution calculates the willingness to pay for the purchase of an office building.