Question

Professional Properties is considering remodeling the office building it leases to Heartland Insurance. The remodeling costs are estimated at $3.4 million. If the building is remodeled, Heartland Insurance has agreed to pay an additional $820,000 a year in rent for the next 5 years. The discount rate is 15 percent. What is the benefit of the remodeling project to Professional Properties?

Answer 1

- $651,234.54

Step-by-step explanation:

Data provided in the question:

Cost of remodeling = $3.4 million = $3,400,000

Rent paid each year = $820,000

Duration, n = 5 years

Discount rate, r = 15% = 0.15

Now,

Present value of the amount rent paid each year = A ×
`\left[ (1-(1+r)^(-n))/(r) \right]`

Here,

A = Rent paid each year

Thus,

Present value of the amount rent paid each year

= $820,000 ×
`\left[ (1-(1+0.15)^(-5))/(0.15) \right]`

= $820,000 × 3.352153

= $2,748,765.46

Therefore,

Benefit = Present value of the amount rent paid - Cost of remodeling

= $2,748,765.46 - $3,400,000

= - $651,234.54