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